Self-managed super funds (SMSFs) are a consistently popular choice by Australians.
The Australian Tax Office report there are now in excess of one million SMSF members with around 30,000 new funds set up last financial year alone.
If taking control of your superannuation was a New Year’s resolution, it is worth considering setting up an SMSF.
What are the things that make an SMSF a sensible choice?
- You want control
Control of your super is only a benefit if you want to be directly in charge of your own investment destiny. That might sound trite, but the truth is that many people have set up an SMSF because someone else – an adviser, accountant, SMSF administrator or real-estate spruiker – wanted them to. If you’ve got no interest in doing the investing, the control of an SMSF is of little value. It might instead be a negative as you have to either employ an adviser or stick all your money in managed funds, both of which bring their own set of costs.
Remember, these days you’ve got other options for taking more control of your super. External super funds (for instance, AustralianSuper or ING DIRECT Living Super) offer ‘pick your own share and fund’ options that allow you to choose what your super is invested in. While they have limitations, these products might give you enough control without having to set up an SMSF.
- You have a large balance
It’s simple maths that someone with a larger balance gets more benefit from an SMSF (all other things being equal). That’s because the costs of running an SMSF are largely fixed. Using our online administration service would cost you around $1500 annually. Full service advice and administration from a financial adviser might cost you $8000 to $10,000 (or more). If you really want to cut costs to the bone, basic administrators like eSuperfund will run your SMSF for less than $1000 a year. No matter which route you choose, the bigger your balance the less you pay as a percentage.
It’s different with external super as everyone pays the same percentage cost. This means the dollar cost increases with your balance (although some funds tier their fees). It’s why traditional super funds don’t work as well for those with large balances.
- You need the flexibility
SMSFs are flexible because, depending on your administrator, you can invest in pretty much anything you want. But be careful not to place too much value on flexibility. Many people don’t want to stray much beyond traditional asset classes like shares, managed funds, term deposits and online savings accounts. If that’s you, one of the ‘pick your own’ super options (mentioned earlier) might give you the bulk of what you need at a lower cost.
Others use SMSFs to buy their business premises or invest in more exotic assets (for instance, art or precious metals). But exotic assets have extra, annoying considerations that apply to them. For instance, art has storage, insurance and valuation requirements. So if you’re setting up an SMSF for the investment flexibility make sure it’s worth it.
- You’ll use the tax benefits
There are some really cool things you can do with SMSFs (that you may not be able to do with an external super account) to minimise your tax burden. At the simple end of the spectrum an SMSF allows you to choose when you crystallise your capital gains, potentially allowing you to delay, or avoid, capital gains tax (CGT) and improving your after-tax returns (‘pick your own’ external super can allow you to do this to some degree as well).
More complicated strategies for SMSFs include:
- managing your tax when moving from accumulation to pension phase;
- using franking credits efficiently; and
- ownership and leasing of family business property
Again, the ability to manage your fund’s tax is only valuable if you use it.
If you tick all the above boxes then an SMSF is probably the right choice for you. But even if you only tick one or two, an SMSF might still make sense on balance.
As you can see there are many more factors than simply a large balance which might make an SMSF a sensible choice for you. But keep in mind that while SMSFs have many benefits, there are also risks, like making poor investment decisions or breaching the SIS Act. An SMSF is a personal decision and it’s important to consider how these apply to your circumstances by seeking genuine, independent personal advice.
If you’ve got the right mindset to run your own fund, 2016 is as good as time as any to question whether an SMSF is right for you and take control of your superannuation.
Richard Livingston and Annika Bradley represent the online financial advice service Eviser (www.eviser.com.au). This article contains general investment advice only (under AFSL 469838). Disclosure: Eviser has a conflict of interest in providing the general advice contained in this article, as Eviser Admin is a competitor to the administration services discussed.
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.