Self-managed super funds: flexibility isn't for everyone
Close to 600,000 Australians have already chosen to take the future into their own hands with a self-managed super fund (SMSF), with thousands more created every month. The control, flexibility, tax advantages and potential lower costs are a strong attraction for investors, and current government reforms are making it even easier to get started.
While self-managed super is gaining popularity, many people underestimate the responsibilities involved in taking control of their own funds. Keeping pace with frequently changing legislation and the large quantities of administrative work required can detract from the benefits, making it important to consider all aspects of the decision before taking the plunge.
Is it worthwhile for you?
Setting up a self-managed fund is unlikely to be financially viable if you have limited capital. Managing a fund means you become responsible for having it audited, administered and monitored by regulators. As well as requiring time, these obligations can cost several thousand dollars a year.
If a self-managed fund is small, ie less than about $200,000, the fees often counter any additional financial gains. Investment Trends analysis found that the average amount used to establish an SMSF is around $300,000 and the average account size is $580,000.
Understand your options
Self-managed super tends to be especially suited to small business owners and the self-employed. These funds give business owners more freedom to invest in things such as high-yield, fully-franked, dividend-paying shares that can dramatically reduce tax liability and increase investment returns.
For these investors, SMSFs also provide advantages outside the scope of industry super funds and master trusts, such as the ability to expand the portfolio to include business real estate and alternative assets such as art collections. The advice of a professional financial planner is especially necessary in these areas as the detailed restrictions can be complicated.
Stay aware of government changes
You should stay abreast of government action that can impact your SMSF.
To give some recent examples (subject to the likely passing of the ‘simpler super’ legislation), from 1 July 2007 onwards:
- Reasonable benefit limits (RBLs) will be abolished
- Lump sum withdrawals and income payments from a superannuation fund or a superannuation income stream will be tax free if you are age 60 or over
- Self-employed persons will have the ability to claim a full tax deduction for their superannuation contributions, replacing the existing 75% deductibility rule for a contribution over $5,000
- Compulsory cashing rules will be abolished, meaning that SMSF members will be able to retain their funds indefinitely in the accumulation phase of superannuation without being required to draw on their retirement savings if the money is not currently needed.
Don’t forget the basics
While running an investment fund gives you the ability to tailor your investment strategy, it is important not to lose sight of the basics. Any investments you make should provide a true retirement benefit, meet other Superannuation Industry Supervision provisions and comply with a written investment policy, which your financial adviser can help you prepare.
Find a trusted financial adviser
The nickname for a self-managed super fund as a do-it-yourself fund is a misnomer. From the point of even considering establishing a SMSF, you should form a relationship with a financial professional with experience in the field.
Your financial adviser can also be instrumental in the process of setting up the fund, as well as handling the ongoing administrative and legal matters that can detract from the time you have to develop and manage your investment strategy.
Contact your financial planner to discuss your situation and goals, and to determine whether you have something to gain by opening a SMSF.