Nearly 200 people are starting Self Managed Super Funds (SMSF’s) in Australia every day. So many funds have been established over the past few years that there is now nearly $500 billion invested in SMSF’s. To put that in perspective – that is more than the combined superannuation investments of all the major institutions (eg AMP, Colonial, BT, MLC etc) combined.
SMSF’s used to be for the wealthy, which is why the average balance in each fund is over $900,000. However this has changed. SMSF strategies are now becoming the superannuation vehicle of choice for all Australians who aspire to leading a comfortable retirement. The average balance of new funds being established is now around $200,000 – and it is reducing every year as more people recognise that SMSF’s are within their reach. Note this is usually the combined balance of a husband and wife.
So why are so many people going down this financial route? Here are some of the main self managed super funds advantages:
People want to take control of their super. They recognise that the institutions have been doing a lousy job of delivering decent investment returns, and believe they can do a better job themselves.
Another of the key benefits relates to SMSF loans. An attractive feature is that it is possible for your SMSF to take out a loan to purchase assets for the SMSF itself. Common purchases that can be made under such a loan agreement include shares, stocks and real estate property. However, it must be noted that SMSF borrowing is indeed tightly regulated, so you speak with an SMSF adviser who will be able to assist you in this regard.
People want the flexibility to invest into asset classes that are not offered by the institutions, such as residential property. You can now borrow in super to buy investment property – so a husband and wife with $100,000 each in super can borrow say $400,000 and buy a house for $600,000.
Fees and Charges:
People want lower fees. The institutions tend to charge a fee based on a percentage of assets. So the more you have in super, the more your fees increase if your super is managed by an institution. However SMSF’s tend to cost about the same regardless of your balance.
People want more tax effectiveness. There are a number of situations in which SMSF’s can be more tax effective than other types of super funds.
People want transparency. And the institutions are not providing it.
It is important to recognise that SMSF’s are not for everyone , and that they do carry some extra responsibility. It is a requirement that an audit of your SMSF must be undertaken on an annual basis. This is normally conducted by a specialist smsf auditor who specialises in these types of reviews. It is therefore recommended to either have some investment and superannuation knowledge or to seek advice from a financial adviser who specialises in SMSF’s.
Furthermore, it should be noted, that there are also certain restrictions involved. For instance, it is currently not permitted to undertake SMSF loans to related parties. This means, that your SMSF may not purchase assets (e.g. real estate property) from ‘related parties’ - meaning yourself, spouse, parents, brother or sisters etc.
Whether you choose to have your own SMSF or not, I would encourage you to take an active interest in your super. It is probably your second biggest asset, and one day you will retire and wonder why you didn't pay more attention to it.
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 or wanting to establish SMSF’s.