Are You Considering a SMSF?
- Control: Ultimately with an SMSF you are taking over management of your retirement assets. If you are unhappy with your current arrangement or want to be more active in the investment selection area this can be attractive.
- Investment choice: With an SMSF you have a very wide selection of assets that are available to invest in. This could be residential property, direct equities, managed funds, term deposits, or even alternative assets such as art or gold.
- Leverage: The ability to borrow money to purchase assets is part of the reason for the increased popularity of SMSFs.
- Tax: SMSFs can be tax efficient, as you have access to more tax benefits, such as using negative gearing or franking credits. The negative gearing and franking credits can be used to reduce your contributions tax.
- Cost: As you typically pay a fixed fee to an accountant each year, the percentage of your fund that is being used to pay for administration can fall as your balance increases.
- Insurance: An area that is often overlooked with SMSFs is the need to put in place a risk management plan. This can be done through personal insurance policies. Most insurers will offer cover that is to be held through an SMSF, and thus you have greater ability to tailor a plan that is specific to your needs. There is the possibility of tax deductions for premiums, and also tax payable on benefits. So it is important to tailor the plan to your needs, and understand the consequences of each option.
- Estate planning: There is an opportunity to plan how your assets are dealt with after your death, or leave the remaining trustees discretion on how to manage the assets. Strategies around anti-detriment payments and insurance payouts can also be used to manage funds assets and claim tax deductions.
Whilst there are many benefits of having an SMSF, there are a number of other considerations to help determine whether this is appropriate for you.
- Compliance: You may be unhappy with the performance of your current fund, and have lost faith in investment managers. However you need to ask yourself honestly, do you have the requisite skills, and knowledge to make smart decisions around investments. Furthermore you need to have the knowledge and skill to administer the account correctly. If you have failed to comply with the requisite legislation the fund can be taxed at the highest marginal rate (46.5%), and further penalties could also apply. Thus you could effectively lose half your super.
- Time: Managing a SMSF can be time consuming. Do you have the time, energy and desire to delve into superannuation law, administration and investment decisions.
- Balance: Do you have the assets to make it viable? A rough guide would be to consider that you likely pay something like 0.5% to 1% in admin fees in your current super. Are the fees your accountant is going to charge to run the admin side of things affordable?
- Trustee: When setting up an SMSF you must take on the role of trustee or director of a company that is a trustee (known as a corporate trustee). A trustee is someone who manages the assets of the fund for the benefits of the members. Thus you are responsible for the compliant running of the fund and adhering to all super and tax laws. Should this be a corporate trustee or individual trustee?
In summary SMSF can offer an attractive vehicle for holding your retirement funds. You can access many more investments, borrow money, tailor it to your needs and take control. However the consequences of being uncompliant are great. It is wise to get financial advice before jumping in to set one up. To misquote a famous line, “With greater control comes greater responsibility”.
By Myles Thornton
Ark Total Wealth Financial Adviser