Self Managed Super Funds (SMSF’s) are becoming an increasingly popular way of saving money for retirement. More and more people are using SMSF’s to take control of their super. In fact there is now more money in SMSF’s than any other type of superannuation fund.
Many Australians have their super invested in a public offer fund (eg AMP, BT, Colonial, MLC, Australian Super). With these types of funds, you pool your super together with thousands of other people and the fund manager invests your super for you. The fund manager doesn’t know much about your situation, so they do the best they can to invest your money for you. This has typically led to poor performance, with most funds producing small or negative returns over the last 5 years. People usually end up in these types of fund by default – because their employer has chosen the fund for them.
SMSF’s are different because they place you in control. You decide what asset class to invest in, eg Australian shares, overseas shares, property, bonds, term deposits, and cash. Then you decide which specific assets to buy. Eg if you are going to buy shares, will it be BHP or Westpac shares? If you are buying property, will it be a house in a coastal town or an apartment in inner Sydney? You can take your personal situation into account, and potentially reduce tax as a result.
If you aren’t an experienced investor then you can invest into a managed fund, although this defeats the purpose of taking control. A good financial adviser with expertise in both investment and superannuation can help you get the best of both worlds – being in control and achieving good long term returns. They can also show you how to use superannuation to reduce tax significantly.
SMSF’s often resonate with business owners – the types of people that own their own business like to be in control of their financial situation. What’s more, many small business people like to buy commercial property in their SMSF and then lease that property to their business.
If you are going to set up your own super fund, here are some things to keep in mind:
- The fund will need to have between 1 and 4 members. Most funds have 2 members being a husband and wife.
- There is no minimum account balance to establish SMSF’s. The fees to operate SMSF’s tend to be around $2,000-$3,000 p.a., compared with around 1.0-1.5% for a public offer fund once you include all the different types of fees. So if you have more than $200,000 in super between you and your spouse then SMSF’s are often more attractive based on fees. The larger your balance, the relatively more attractive SMSF’s become. Keep in mind that there is more to this decision than just fees – you should consider whether you can achieve better returns than a fund manager, and whether control is valuable to you among other factors.
- You can’t benefit personally from your super fund investments. Eg if you buy property you can’t live in it (there is an exemption for commercial property). If you own artwork you can’t display it on your wall at home.
- You must be an Australian resident to operate SMSF’s.
- To establish the fund you will need to complete a number of documents, and you will then need to register the fund with the ATO. There are plenty of SMSF administrators that can help you in this respect.
- Your SMSF will need to prepare a set of financial statements, lodge a tax return and undergo and audit each year. Once again, there are numerous SMSF administrators that can help you.
Greg Einfeld is the founder and Director of Lime Super. He is a qualified actuary, has completed MEc and MBA degrees, and has worked in the superannuation industry for over 20 years. He provides specialist investment and financial advice to people with SMSF’s.