The key driver of this has been the desire by baby boomers to gain greater control over the investment assets of their fund, rather than leave it to fund managers. However, what is not widely known are the other key benefits, that along with investment choice, makes Self Managed Superannuation such a powerful retirement vehicle.
The key driver of SMSFs has always been investment control, and the much wider investment choice (such as direct shares, direct property, hedge funds, art work etc) that trustees have compared to commercial super funds. However, the real benefit is not just in “choice”, but in the ability to have more sophisticated investment strategies working for you. For example within equities, being able to access derivative based strategies such as 'covered calls', or hedging via CFD's can be a very effective way to attempt to enhance returns whilst simultaneously attempting to reduce volatility. This is particularly useful in difficult or falling markets. Other examples include small business owners leasing their business real property (that is used by their business) from their SMSF, borrowing to invest via installment warrants, direct property investments, and many others.
A major benefit of SMSFs that is slowly becoming more widely known is the control and flexibility that trustees have over the tax position of the fund. Through either strategic investment planning (such as maximising franking credits) or internal structuring, tax can be significantly reduced (and in some cases, totally eliminated with refunds paid from the ATO), particularly for those in retirement. There is also great flexibility in terms of dealing with the tax liabilities of the fund, as the fund only does one tax return even though there can be up to 4 different members in the fund. There is even a strategy that exists whereby other current and future members can benefit from huge tax deductions for future years on the death of a member.
Not so well known are the excellent estate planning benefits inherent in SMSFs, and the fact that your Will does not necessarily control your superannuation benefits. The key here is that you can craft a strategy to accomplish exactly what you are after, with exceptional tax efficiency. This includes being able to leave tax advantaged (sometimes tax free) income streams to dependant beneficiaries with control around when they receive a lump sum, and to effectively look after child beneficiaries in a way that no other structure can match. Further to this, SMSFs can make binding nominations that do not lapse, unlike commercial super funds which have to be continually updated. When you start to understand some of the powerful strategies that can be employed in a SMSF, especially from an estate planning perspective, it is easy to see why a SMSF starts to become viewed as a tax advantaged intergenerational wealth vehicle.
A few years ago new rules were introduced which allowed superannuation funds to borrow money under a particular type of arrangement. These new rules can be fully utilised by SMSFs, however they have limited application in large commercial super funds. This ties in with the "Investment choice" benefit mentioned above, whereby this now makes it much easier for trustees to acquire direct property in their SMSF as property is usually a big ticket item, and generally requires an element of borrowing.
For many people (but not all, and depending on your account balance), the cost of running a SMSF can be significantly lower than that of an alternative retail, industry of other commercial super fund. The main cost for a SMSF is the completion of the annual administration requirements of the fund. As you'll see from our information on SMSF Admin on this website, there is no industry standard in terms of costs, however if we look at the average cost of an average sort of fund, then the cost will be around about the $2,000 to $2,500 pa mark. Commercial super funds on the other hand tend to charge as a % of your fund balance, with a range of around 1% to 2% pa depending on the fund and underlying fund managers used. So if you've got a flat cost of around $2,000pa for your SMSF, then the more money your SMSF has, the lower the % cost will be. For example, if you've got $300,000 in your SMSF (and remember, that can be made up of up to 4 members' balances combined) and you pay $2,000pa for annual admin, your cost is 0.66% pa. Compared to most (if not all) commercial super funds, this is very cost effective.
For those members nearing the pension phase, the SMSF allows the most seamless transition from accumulation into flexible income streams. As with all Super funds, the ability to take tax free income streams on retirement is a big incentive to stay within the superannuation environment, and as seen by the above benefits, the SMSF offers a lot of flexibility in terms of how you go about it.
The Asset protection afforded in a SMSF is crucial in a world where litigation and bankruptcy has become commonplace. In either of these events, your benefits are protected, even if you withdraw some of this to live on. Note that this is the same with commercial super funds.
Once you begin to learn it’s intricacies, you can
start to understand why the SMSF is such a popular and effective
retirement vehicle, however you must also be willing to
take on the significant responsibilities that being a SMSF
trustee entails. If you are, then the potential for better
returns, tax control, effective wealth transfer, asset protection, and peace of mind
are a potent combination, which can take the quality and
security of your retirement to a whole new level.
For more detailed information on the above issues, see our SMSF Technical Education & Strategies section.
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