Money isn’t everything, but everything needs money!It is important to maintain a consistent flow of wealth. It’s here that self-managed superannuation fund can come to your help.
When you systematically contribute to superannuation during the course of work-life, you can eventually have considerable savings at disposal once you have retired (or semi-retired). You can use these funds to pay your bills, cover the (ever-growing) medical expenses and live a decent life.
A majority of Australians are now seeking ways to take control of their superannuation funds, it is reported that SMSFs hold approximately one-third of the total superannuation funds, and often are the preferred choice for people who are highly engaged with their superannuation and retirement planning.
Here are the top reasons why superannuation is incredibly important:
SMSFs consist of approximately one-third of the total superannuation funds. In fact, it is one of the most preferred choices for people who are super involved with retirement planning.
The 5 benefits of an SMSF:
1. Investment Choice
One of the key benefits of a SMSF is investment control, and the wider investment choices such as residential and commercial property, collectibles, term deposits and direct shares that SMSF members have compared to industry and retail super funds. You will also have access to derivatives to offer downside protection or hedging your portfolio risk.
One of the main reasons that SMSFs are recommended for small business owners is to be able to have business property owned by their SMSFs and then leased back to the business. This gives a steady income for SMSFs and frees up any capital in order to grow your business and provide secure tenancy.
2. An SMSF can borrow to invest in property
With the rules that allow SMSFs to borrow, SMSF members can now purchase large single assets such as commercial property that would otherwise be outside of their reach. For example, a couple with a combined SMSF balance of $200,000 can borrow money via a limited recourse loan to purchase an investment property worth $400,000. Generally, a limited recourse loan can be secured for up to 60%-70% of the purchase price of a property. This excludes other costs associated with the purchase such as legal, stamp duty etc.
Important rules to note:
- Residential investment properties purchased through an SMSF cannot be lived in by you, any other trustee or anyone related to the trustees.
- Don’t buy a “renovator’s dream”. Borrowed funds can be used for property maintenance but cannot be used to improve a property. This also means that you cannot buy and empty block of land with the view to build a property on it at a later stage. This also means that you can’t purchase a development site with the view to develop it at a later date, or buying an old house with the plan to knock-down rebuild.
3. Tax Minimization
Apart from defined benefit super funds (like a government employee fund), most other superannuation funds will offer the ability to take a tax-free pension as an income stream upon retirement.
Another benefit of an SMSF is that it gives you more flexibility than any other superannuation structure when it comes to contributions, the timing of contributions, allocating earnings to particular members and implementing ‘reserves’.
This provides trustees and their professional advisers the ability to use the unique flexibility of an SMSF to minimize the amount of overall tax that the SMSF members pay within the fund, by taking their unique situation into consideration and making strategic decisions on contributions, reserves and distributions. In a public offer or ‘pooled’ superannuation fund, your unique circumstances cannot be considered because you are just one of thousands or even millions of members who all must be treated the same. This means that the trustee of the large superannuation fund may make a decision that negatively affects your tax position, and you have no way to prevent this.
4. Tax Control
Through timing pensions and structuring as well as tilting investment strategies to utilise the concessional tax treatment for the funds, like targeting franking credits, tax can be reduced and for most retirement phase client’s refunds can be claimed from ATO for any excess credits.
There is also the flexibility when it comes to dealing with taxable liabilities for your fund, as this fund only has one single tax return although there may be up to four different members for the fund and each can have numerous pension accounts. Where the fund has one or more members who have retired and are therefore paying 0% tax, tax advantages can be achieved by allocating earnings from members who are not retired and are therefore sitting in a 15% tax environment.
5. Pay for your Life Insurance through your SMSF
You are able to pay for your personal insurance cover through a SMSF. This includes;
- Life Insurance
- Total and Permanent Disability (TPD) Insurance, and
- Income Protection insurance
You may have some insurance cover through your current industry or retail fund. This cover is referred to as ‘group insurance’ and isn’t tailored towards your needs, plus it can be reduced or cancelled by your super fund at any time without your consent.
If you apply for personal insurance that is tailored to your individual needs it is ‘guaranteed renewable’. A ‘guaranteed renewable’ policy is an insurance policy feature that obligates the insurer to continue coverage as long as premiums are paid on the policy.
The group insurance cover that you are automatically provided with through your industry or retail fund is often inadequate in terms of the levels of cover, plus the terms and conditions of the insurance contract.
Your insurance needs are highly personal. Your levels of cover should be determined by your age, family structure, income, cash flow requirements, debt levels, assets and liabilities to name a few variables.
Only a qualified Financial Planner can make a full assessment of your personal insurance requirements, plus make a recommendation on the following;
- What insurance cover you require – life, TPD, IP etc
- The levels of insurance cover
- The best premium structure for your situation
- Options and add-on’s to your policy that are relevant to you
- Which insurance company offers the contract that is best for you, based on the quality of the cover and the premiums. Like with anything in life, often the cheapest option isn’t the best option.