Self managed super funds can put you in the driver’s seat, offering a level of control over your retirement savings that is increasingly attractive to people in Newcastle and to all Australians.

Self managed super funds (SMSFs) have grown in popularity over the years with latest figures showing they account for 31.4 per cent of total superannuation assets, up from 10 per cent a decade ago. It’s not surprising that they are proving so popular. SMSFs can give you more control over the investments you choose, when you buy and when you sell assets. And there can also be additional tax benefits.

To set up an SMSF you need to create a trust deed, register for an ABN, open a bank account and work out an investment strategy.  It is estimated that this process can take six to eight weeks. Given that it is important to get your fund off on the right footing, seeking professional help is vital.

Tax-effective super

Superannuation is a tax-effective vehicle as generally you only pay 15 per cent tax on your concessional contributions and 15 per cent on any earnings in the accumulation phase rather than your personal marginal tax rate which could be as high as 46.5 per cent.  And when you reach 60 and the money has moved into the pension phase, you don’t pay any tax. But those benefits are enhanced with an SMSF as there are a number of further tax-effective strategies.  For instance, you can defer your 15 per cent contributions tax for up to 13 months during which time that money can also be earning income. In addition, imputation credits from Australian shares can further reduce a fund’s tax liability. Franked dividends carry imputation credits (in respect of company tax already paid) which can be offset against tax payable. For funds in the pension phase with no tax liability, the franking credits are fully refundable.

For business owners there can also be tax advantages from transferring a business property into an SMSF, not least because the remaining capital gains tax liability on sale may be as low as 10 per cent when in the accumulation phase, or nil when in the pension phase.

Greater choice and flexibility

Not only does an SMSF give you greater control over your investments but you also enjoy more flexibility in your investment choice. For instance, you can invest in direct property. These days an SMSF can borrow through a limited recourse loan to purchase property or shares (via instalment warrants), giving the fund greater leverage to build your retirement savings.

If your fund buys a residential property, the purchase of the property must be an arm’s length transaction and not involve related parties. The property cannot be for personal use as the purpose of a superannuation fund is to set money aside for your retirement, not to fund your current lifestyle.

Is an SMSF right for you?

Setting up an SMSF is not a step that should be taken lightly or without professional help and BMK Financial Services can guide you with this and all your super decisions. You will need a balance of at least $200,000 as ongoing expenses can take their toll on lower balances. An SMSF can also be time consuming in terms of ongoing investment research, administration and compliance requirements.

As a trustee of the fund, you have legal and fiscal responsibilities. If you fail to meet them your fund may be deemed non-compliant resulting in additional tax liabilities and fines. Of course with the right professional assistance, an SMSF can work well for you, not only providing great control, but also offering flexibility, tax efficiencies and lower fees.

Getting professional assistance

Having greater control does not mean you have to navigate the journey to retirement on your own. Different levels of assistance are available, depending on your understanding of the responsibilities associated with being the trustee of an SMSF and the amount of time you have to devote to running the fund. While you will need to obtain an independent audit every year, an accountant can help you set up your fund, and we will work with you to ensure your investment strategy is properly managed and reviewed.

Use your investment choice wisely

While you can have much greater freedom in choosing your investments when you have a SMSF, it’s important you take advantage of this option. In many instances, SMSF trustees ignore this benefit, often leaving their money in cash or favouring Australian over offshore shares. The danger here is that you don’t diversify enough and then struggle to maximise your returns. It’s another reason why professional advice is paramount. But if you diversify well, then an SMSF has many benefits, not least allowing you to take the wheel and control how you build your retirement savings.

For more information call or text Brad Lonergan on 0423 621 120 or via email brad-kate@bigpond.com.au

May 2014: SMSFs: The road to retirement