SMSF Explained - Benefits of an SMSF
A self-managed superannuation fund has a range of unique benefits. The best known is control and flexibility, however there are also a range of other benefits.
9 Benefits of a self-managed super fund (SMSF)?
A self-managed superannuation fund has a range of unique benefits to maximise your retirement savings when compared to other superannuation funds.
The best known is flexibility and control however, there are also a number of other benefits of SMSFs that members can leverage to maximise their retirement savings, this includes things like asset protection, estate planning, tax strategies, borrowing and much more. Dive into the 9 benefits of a SMSF below to see the real value from joining Stake Super.
What are the benefits of a SMSF?
1. Flexibility and control
Unlike industry or retail superannuation funds, SMSF members have total control over where their retirement savings are invested. Meaning you determine what the fund invests in, and when investments are made as well as have the flexibility to change the investment strategy as you see fit. For example, you have investment control to make decisions in response to market conditions or to access a new opportunity.
As a function of having full control over investment decisions, one of the other key benefits of a self-managed super fund is having complete clarity on the fund's investment portfolio, past investment decisions as well as the current and intended future investment strategy.
3. Range of investment opportunities
The Australian Taxation Office (ATO) sets out key principles for allowable superannuation assets within an SMSF to ensure 'arm's length' transactions are made. Provided these are met, a SMSF can invest in almost anything.
Some of the investment assets include direct listed securities, direct property, managed funds, cash & term deposits or rarer investments including v/c's, start-ups and collectables, a self-managed super fund provides members with the ability to invest in a wide range of investment options.
4. Borrow to invest in property, shares or funds
An SMSF is allowed to borrow money to buy commercial property, shares or funds via a Limited Recourse Borrowing Arrangement (LRBA). It is termed limited recourse because if you are the trustee default on the loan, the lender's recourse is limited to the asset acquired thus protecting the other assets in the fund. Funds with an LRBA could stand to benefit from increased investment income and capital growth which are both taxed at a maximum of 15% within an SMSF as opposed to a maximum of 45% outside of an SMSF.
5. Cost structure
In the vast majority of cases, SMSF management costs are fixed. Meaning that the fees as a percentage of total portfolio will decrease as the portfolio increases. This can have a significant impact over time when compared to other superannuation funds which typically charge fees as a percentage of total portfolio balance. This structure can also have a dramatic effect when pooling super via a SMSF with multiple members (see below).
6. No minimum balance & ability to pool your super
There is no minimum balance to set up an SMSF and whilst set up and ongoing administration costs can be higher than other superannuation funds for lower balances, self-managed super funds allow up to six members to pool their super within one fund, thereby significantly reducing the relative size of fees and also increasing the investing capital.
7. Tax benefits
SMSFs benefit from a lower tax rate of 15% on investment income and capital gains tax as well as no tax on assets wholly supporting an income stream such as a pension. Whilst this concessional tax treatment also applies to other super funds, because of the range of investments available and control over investment decisions, the superannuation tax concessions within an SMSF can often have a greater impact.
8. Protection from creditors
Asset protection is the process of using a legal structure to keep your assets safe from legal action, including action from creditors and hostile beneficiaries. In some cases, SMSFs provide you with an effective way to protect your assets from any future claims from creditors or bankruptcy.
9. Estate planning benefits
SMSFs can be a highly effective way for distributing your wealth with superior tax outcomes. This includes being able to leave your taxable pensions to dependents who are able to receive them as a lump sum, pension or a combination tax free, or substantially tax free for non-dependents.
What are the disadvantages of an SMSF?
While there are many benefits of an SMSF, they are not for everyone. Find below some of the key considerations that need to be taken into account when determining if an SMSF is preferable to other types of super funds.
Given SMSF trustees have full control over the fund's investing decisions (and thus performance), they should have a good understanding of financial markets and investing.
Responsibilities of being a trustee
SMSF trustees have the responsibility of ensuring that the fund is managed in a way that complies with all relevant superannuation legislation and regulations. SMSF administrators such as Stake can do all of the administrative heavy lifting however the trustees are always legally responsible for the fund to meet SMSF compliance.
Can't live permanently overseas
SMSF trustees must reside in Australia on a permanent basis. Trustees can live and work overseas for up to 2 years. However, as a general rule, if a trustee resides outside of Australia beyond this time the SMSF would no longer be compliant.
Can be time consuming
Setting up and managing an SMSFs can be a time consuming process however this has significantly decreased with administrators such as Stake Super who manage all compliance obligations (accounting, auditing, taxation, etc.) leaving trustees to focus on managing the investments of the super fund.