Strategy 2 of our Top 5 Pre Retirement Strategies eBook is to take control and set up a Self-Managed Super Fund (SMSF). The following has been taken from our eBook.
Strategy 1 has provided you with some very clear information on why building your super makes sense for your retirement. It is quite simply the best tax structure available in Australia, however when you invest your super in the big public offer funds, like the industry funds or other retail funds like AMP or MLC, they restrict you in a range of ways.
This is where Self-Managed Super Funds come into the mix and depending on your circumstance’s can be the hands down best solution for your future.
Simply put, Self-Managed Super Funds or SMSF’s as they are known, are a highly personal superannuation structure. The maximum number of members is 4 people and for this reason, they are normally used by either an individual or a family and Australia has embraced them.
|“Currently over $750 billion is invested and they make up more than 20% of the total Superannuation pie.”|
While not age dependent, they are most popular with people nearing retirement; or who are already retired.
Why this is a good option
An SMSF is your very own, purpose built retirement structure, like building your dream home – it’s designed by you, to benefit only you and your family’s unique retirement needs and there is no other super structure available that gives you as much flexibility and control.
Some of the benefits this control brings includes:
Great tax planning flexibility;
The widest choice of investments;
It can be less expensive than the alternatives;
Great Estate planning options;
You can borrow to invest;
You can pool funds with other members (typically husband and wife do this) to buy a bigger asset than you otherwise could and/or diversify better;
It allows business owners to buy their own premises.
Some detail on the first three points noted above, to illustrate how you can benefit and why SMSF’s are a great tax planning tool for your retirement:
So by now you know I am a big advocate of the tax concessions of super and would love to see you benefiting from them, but with the control an SMSF gives you, you can make your after-tax balance even better and tailored to your specific situation. Three examples of this include:
1. Control over Capital Gains Tax – You get greater control to sell assets, considerate of capital gains, when appropriate to you, whereas the majority of other super funds will sell down when they deem appropriate, without consideration of your individual tax position.
2. Control over investing into shares with Franked Dividends – Shares that pay franked dividends give you up to a 30% tax credit for tax the underlying company has already paid. Considering super funds are only taxed at up to 15%, it is actually possible to run your fund tax free or even to be eligible for a tax credit, if your strategy is to favour high paying franked dividends (i.e. dividends from shares). Most other super funds do not give this flexibility.
3. Ability to borrow – the interest on any loan is deductible to the fund, so if you borrow to purchase a property for example, the interest cost may further reduce the income of the fund, assuming it outweighs the income received from rent. The idea of negative gearing is of course to then benefit from the growth of the investment, so a low income, high growth property could reduce your fund’s tax payable. Keep in mind you don’t want to borrow for the sake of borrowing, as it is a higher risk strategy.
|“Tax is a straight out cost on your investment return and if you can pay less, without compromising your return then you will achieve your goals sooner. Simple as that!”|
You can invest in almost anything you want
As a general rule of thumb, if what you want to invest into is for the ‘sole purpose’ of your retirement then you probably can and this opens up a world of possibility for how you invest for retirement.
It can be the cheapest way to invest your super
Research has been conducted by various institutions such as the University of Adelaide and Rice Warner demonstrating that cost efficiencies can currently be achieved with a balance as low as $200,000. I can see how this would be possible, however from my observation it’s more typical to achieve cost benefits from anywhere between a $300,000 – $500,000 balance. A big discrepancy I know, but it really does depend on the strategy you deploy and who you choose to use for your tax and administration.
One attractive thing about SMSF’s and a way to grow the balance needed for an SMSF to make sense for you, is that you can pool your super with up to three other people. Normally we would see this between husband and wife or in some instances business partners, but for various reasons we would caution grouping with others.
|“With costs coming down and management of an SMSF getting easier due to technology and competition, it is very likely we will see continued growth in the SMSF sector”|
What scenario and risk profile/person does this make sense for?
An SMSF can be suitable for any risk profile, as you can put your money into everything from capital guaranteed investments like cash or more growth oriented investments like property. However, given how much more investment choice you get with an SMSF, it is important that you remain very aware of the risks that you are taking with your investing.
Furthermore, every member of an SMSF must also be a Trustee and this means that you become personally responsible for managing your super within the framework of the law. Thinking about this another way, I gave the analogy earlier about owning an SMSF being like building your dream home. It is, but in this example, you are also an ‘owner builder’. As a trustee, you are responsible for the decisions of the fund and therefore it is important that you understand your obligations and are prepared to spend the extra time necessary to set up a Self Managed Super Fund successfully.
For extra prudence, you should also speak to a financial planner to have them sanity check whether you should set up a Self-Managed Super Fund with you, taking in to consideration your tolerance for risk, age and alternative strategies amongst other things. A Financial planner should also be able to assist you greatly in making your fund run smoothly.
Check back next week when we provide Strategy 3 – Use some equity in your home to invest in Shares and/or Property – or download our Top 5 Pre-Retirement Strategies eBook here.