Choosing to take your super into your own hands is a popular option but is it the right choice for you?
As of September 2018, there were almost 600,000 Self-Managed Superannuation Funds (SMSFs) in Australia according to the Australian Tax Office (ATO), along with over 1 million members. Choosing to take your super into your own hands is a popular option but is it the right choice for you?
To help you decide, we have detailed five (5) key considerations to take into account before embarking on the SMSF journey.
Have you considered what an SMSF involves?
1. Why are you wanting to set up an SMSF?
Having an SMSF requires a lot more work than staying with a public offer superannuation fund. You need to weigh up the benefits and costs to determine if it suitable for you.
Having greater control over how your superannuation monies are invested is one of the main reasons people choose an SMSF. An SMSF puts your superannuation in your hands; you decide what shares to buy or what assets you'll invest in to gain the best returns. If you don't trust a general fund manager with your retirement savings, using a licensed financial advisor might be an option for you as they can help you make the right investment decisions.
Another reason an SMSF might be of benefit to you is the additional flexibility it can offer. Unlike a public superannuation scheme, an SMSF gives you the flexibility to make investment choices that suit your individual preferences and circumstances. For example, you may prefer to invest in real estate rather than shares. This can be particularly attractive to small business owners who can use an SMSF to buy their business premises. Using this strategy, the business pays rent to the SMSF, which provides tax benefits for the business and an annual income to the SMSF to save and invest for the future. If the SMSF doesn’t have enough cash to buy the property it can borrow to finance the shortfall.
An SMSF also provides you with greater flexibility around drawing a pension from the fund. With your accountant you can tailor a specific strategy that provides you with a tax effective income as you approach retirement.
2. The tax benefits of superannuation
Both general superannuation schemes and SMSF funds receive the same tax benefits. You can make use of these to save yourself tax as you plan for your retirement. Some of the tax benefits include:
● 15 per cent tax rate on contributions received by the fund and on investment earnings,
● 10 per cent tax rate on capital gains made on assets held for at least 12 months.
● Tax-exempt earnings in the fund if the assets are being used to pay a pension to the member(s). This is limited to a balance of $1.6 million per member.
● For members aged 60 or over, pension payments to members are tax free.
An SMSF allows you control over how you invest your funds.
3. The rules and regulations that apply to SMSFs
Setting up an SMSF means abiding by the high level of regulations set out in the Superannuation Industry Supervision Act 1993. Non-compliance with the rules can result in strict penalties. Everything from how many members there are per fund, to the diversity of your investments and the reporting and auditing that goes along with it are closely monitored and regulated.
In a general scheme this is mostly managed for you, however by choosing to opt for an SMSF it becomes your responsibility.
4. The administration costs involved with having an SMSF
Running your own SMSF costs money. Each fund needs to prepare an annual financial report and tax return, as well as have it audited. The administration cost for these services varies, depending on the size and complexity of your fund with these expenses borne by the fund members. By contrast, public offer funds can spread these costs over thousands of members, making it a cost-effective option.
Have you thought about what you want to happen with your super once you're gone?
5. How will your SMSF fit in with your estate plans?
Your superannuation death benefits are not automatically included in your Estate and cannot be dealt with via a Will. It is important to note that any funds remaining in your superannuation account after you pass can only be dealt with by making a written nomination that specifies who you want to leave your superannuation monies to. Without this legally binding agreement, your superannuation funds may not be paid to the intended beneficiaries. Make sure you seek legal advice will ensure this is properly documented and fits into your estate plans.
Your superannuation is an important part of your retirement plans. If you are considering an SMSF reach out to VBA today to discuss whether it is the right choice for you.