When compared to a regular super fund an SMSF is a private fund that is managed by the owner and the trustees that are appointed by them. This offers the owner an extra amount of control over their money with the added flexibility to make their own financial decisions. Aside from this added freedom, there is a list of additional benefits to putting your super into an SMSF. Here are the top 3 Advantages of having a Self-Managed Super Fund.
Having an SMSF gives you the ability to invest your super into financial alternatives outside of the stock market, including property, art, collectables, term deposits and direct shares. Investing outside of the traditional stocks gives you the ability to hedge the risks to your savings by placing capital in different places and not relying exclusively on the unpredictability of the stock exchange to grow your funds.
Part of the benefits of having more investment choice is that you are able to borrow money to spend on an investment property, which can then be used to earn an additional income and provide an extra asset for the fund. However, when a property is purchased through an SMSF, those who own the fund, or anyone related to them are not allowed to live on the property, as it would be classed as a primary residence, thus removing the tax benefits that you gain from having an investment property.
SMSF’s leasing a commercial property back to a related business is a common trend especially with Medicos who own or “want to own” the freehold where they run their practice out of.
An SMSF gives the holder more flexibility than other types of fund when it comes to when and how you contribute to it, while also minimising the amount of tax you pay on the fund per year. When it comes to tax, you are able to reduce your tax bill by allocating earnings to members of the fund. The amount of tax that the fund owner needs to pay is calculated by taking into account the fund owners circumstances from the past financial year and making decisions based off the contributions made to the fund, the amount of money left in the reserves and how the fund’s money was distributed during the year.
If a SMSF is correctly managed the tax rate payable per year could reduce from 30-45% down to 0-15%.
Transferring wealth to the next generation
When you are thinking about your superannuation, you don’t often think about what is going to happen to the money that is left in the fund once you are gone, or how it will be distributed amongst your family members.
SMSF’s offer security by ensuring that capital secured in the fund is safe and efficiently distributed upon the death of the fund’s owner. Unless you state in your will that your superannuation benefits are included as part of your estate, they are not included in your estate and need to be executed separately.
When using an SMSF, you are able to leave clear and concise instructions that ensure that your superannuation benefits will be distributed according to your wishes. This can include leaving any taxable pensions that you have to dependents or non-dependents who will be able to receive them with little to no tax included with the gift.
An SMSF will also let you set up your superannuation funds as a tax-effective stream of income for dependents such as spouses or children. There are 3 ways this is done, firstly you can set an amount to be paid to the dependent on a regular basis such as yearly. Secondly, you can have your fund paid out in a lump sum, which is probably one of the most common methods. Or, finally, you could have it set as a mix of both, with an initial lump sum being paid out and the rest being paid out on a regular basis.
While there are a multitude of benefits to owning a Self Managed Super Fund, there are a few downsides that need to be considered before opening one. One of which is control. While control can be a positive for most people, owning an SMSF requires you to be extremely proactive in the management of your money, so it’s not a good fit for some people. Another crucial one is that it is a costly process. From set up to annual running expenses, there are a myriad of fees that come with managing your own super account.
If you are interested in a Self Managed Super Fund or would like more information to help decide if it is right for you, contact your accountant or financial advisor. I am happy to give you advice surrounding what finance is possible within your fund.