SMSF

It’s a common misconception that having a super fund with low fees or the one with the best performance will be enough to secure your retirement. Advertising Agencies prey on this topic and we have all seen commercials suggesting that a lower administration fee is the key to your retirement income. However, since the GFC (Global Financial Crisis) hundreds of thousands of people have become disillusioned with the losses their superannuation funds have suffered in the hands of the so-called “experts”.

Why set up a Self Managed Super Fund?

SMSFs have 5 major advantages over their Retail and Industry Super Fund counterparts which can make them a preferable retirement vehicle for some individuals.

1) SMSF Borrowing (or Leveraging)
Many people are looking deeper into the options available. A massive shift away from the “managed fund” is occurring today and more and more people consider alternative retirement options such as owning property or shares inside their own Self Managed Super Fund. We would like to cut through all the hype and give you the simple facts you need to know about SMSF… the benefits, the drawbacks and when you may want to consider running your own SMSF.

SMSFs are regulated by the Australian Taxation Office (ATO) and perform the same role as other super funds: collecting and investing your contributions and making them available to you when you retire. The difference is that as a fund member you’re also a trustee who controls how and when to invest your contributions and also how and when to pay your own benefits. A SMSF can have up to four members. They will almost always be family or close business associates.

2) Investment Choice
Retail Funds set up by Financial Advisers often have a larger number of investment options (including managed funds and shares) whereas Industry Super Funds tend to have more basic investment options. Both types of accounts have their market and purpose. Most people have little or no input into the establishment of their Super Fund and end up with a default strategy set up by someone else, whether it is their Financial Adviser or Payroll Administrator.

While this may seem to work for the majority who do not take an interest in their Super, it can have significant long-term effects on your retirement income. In traditional Retail and Industry Super Funds you are expected to provide all the cash to fund your investments which can significantly limit the growth potential of your Super Fund. Legislation changes have allowed Self Managed Super Funds to borrow money (gear) internally to purchase investments, that is, you can now grow your wealth faster by using someone else’s money. This also gives you the opportunity to access a wider range of investments (such as direct property, specialist property trusts, equities or shares, and even broader investment products) that may not have been previously achievable with a smaller account balance.

SMSFs allow you to purchase an almost unlimited variety of investments and can be a tool to minimise tax on your other investments. For example, you may be able to integrate your share portfolio into the fund. However, you won’t be able to access the funds until retirement and access may be affected by changes in legislation. You can also decide when to buy or sell investments and thereby minimise Capital Gains Tax.

Another example is that SMSFs are an excellent way to invest in real estate especially if you are borrowing. For those in a position to do so, this is a more effective way to buy property than traditional negative gearing with greatly reduced personal risk. The greatest benefit of SMSFs is in having the choice and making investment decisions for yourself, not somebody who does not know or understand your financial situation.

Don’t underestimate the power of choice coupled with sound advice and an annual financial health check. Remember that your Super Fund is likely to be your most valuable asset after your home. So taking more responsibility for the health and vitality of your second (if not first) most valuable asset is not only common sense, it is essential in planning for your future, particularly your income and lifestyle post-retirement.

3) Fees
Retail and Industry Super Funds charge their fees based on your overall account balance, which means larger account balances attract larger fees. In most cases, SMSFs operate differently. After your initial set-up costs, your fees are based on what it costs to provide ongoing financial accounts, auditing of these accounts and financial support. So for larger account balances you could make significant fee savings by having a SMSF.

4) Tax Advantages
When you have your Super in a Retail or Industry Fund you have very little flexibility when it comes to tax. There are a range of tax strategies which are unique to SMSF that can have a big impact on the growth of your account. There are many other benefits that may have an even greater impact depending on your personal circumstances. SMSFs offer much more flexibility in managing your Estate Plans by better matching your insurance needs.

5) Achieving Your Retirement Income Goals (Family Wealth Management)
The mental rewards of getting involved in achieving your retirement income goals through a SMSF are very satisfying. Many Retail Fund members have little or no involvement in deciding how their money is being invested, which leads to apathy. Many Retail and Industry Super Fund members don’t even know how much they have in super, so how do they know if they are on track to achieve their desired retirement income?

Taking control actually gives you a better appreciation and interest in your savings, which often leads to better decisions and ultimately a better retirement. When you make the decision to take control and get serious about planning your future, there are a number of services available (such as our financial health check service and income planning calculators) that we regularly provide to our existing clients on an individual basis.

Recent Legislative changes make SMSF even easier. The Legislation regulating SMSF has undergone many changes over recent years, the most significant of these changes being the introduction of gearing/borrowing. Before this change, alternative investments such as residential property were not available to SMSF investors unless they were able to accumulate all the cash themselves. Today, one of the fastest growing industries is in fact the SMSF industry.

Is SMSF Right for Me?
SMSFs are really for those who want to take control of their savings and have involvement in their investment decisions. You need to be willing to be responsible for your own financial future and security. There are detailed legal requirements for operating a Self Managed Super Fund that must be adhered to, so you will require good quality accounting advice and support from us. The good news is that we provide a comprehensive service to SMSFs and therefore can manage your SMSF so it doesn’t take up much of your time. We will co-ordinate the set up and administration for you and ensure you have direct access to investment options such as property and shares, where appropriate.

Understanding you, your personal circumstances and what you want to achieve is the foundation to a sound financial plan. Your circumstances change frequently during the year, so we will meet with you regularly to make sure you are on track and if necessary make adjustments.

While there are no restrictions on the minimum amount to have before you can invest through a Self Managed Super Fund, talk to us about the minimum threshold that makes it cost-effective to set up a SMSF.

What’s the Process?

The process starts with general discussions about the advantages and disadvantages of setting up an SMSF. We then implement what we call our “Discovery Process” which sees us collect your information and discuss in detail your financial goals and objectives. This process allows us to ascertain your risk profile and tolerances.

With this information we then provide a comprehensive Statement of Advice which outlines the strategy, associated costs and the requirements. Once you, the client, are satisfied with the advice, we are then engaged to establish the fund, the associated bank accounts and the investment platform through which the investment will be managed.

If you are new to the SMSF world we understand that it is important to make the process as simple but informed as possible. Our advisers and support staff are very experienced at dealing with the questions and issues that come up, particularly in the early stages of the fund’s establishment.

The basic steps in establishing a SMSF

1. Appoint SMSF professionals to help you set up and run your fund. (Portfolio Strategies )
2. Decide which trust structure to use for your fund
3. Make sure all the members are eligible to be trustees
4. Check the residency of your fund
5. Create your trust and trust deed
6. Appoint your trustees
7. Record each member’s Tax File Number
8. Open a bank account for your fund
9. Register with the ATO
10. Prepare your investment strategy

SMSF Strategy Advice

The three key elements of most sucessful strategies are preservation of capital, genuine diversification and where appropriate…leverage. Here’s some of the SMSF strategies :

1. Gearing in Super – transferring business premises into an SMSF
2. Gearing in Super to acquire assets (property or shares)
3. Establishing Reserves with investment gains
4. “Lock in” tax-free proportions for income streams
5. Maximising Contribution Caps (cash & in-specie)
6. Segregating to capitalise on the recovery
7. Recontribution and multiple income streams post age 60
8. Using Reserves effectively for pension accounts

Establishing a SMSF

The basic steps in establishing a SMSF are;

1 Appoint SMSF professionals to help you set up and run your fund (Portfolio Strategies we hope !)

2. Decide which trust structure to use for your fund

3. Make sure all the members are eligible to be trustees

4. Check the residency of your fund

5. Create your trust and trust deed

6. Appoint your trustees

7. Record each member’s tax file number

8. Open a bank account for your fund

9. Register with the ATO

10. Prepare your investment strategy

(The ATO has a booklet ‘Setting up a Self-managed Super Fund available from their website ato.gov.au).

Finance Inside And Outside SMSF’s

In September 2007 the SIS act was amended to allow SMSFs to borrow to aquire certain assetts. Borrowing to buy property or direct shares inside an SMSF is a highly regulated procedure requiring specfic finance structures, custodial trustees and loans. Its just not as simple as talking to your local bank manager.

Through our seperate finance broking business Portfolio Financial Group Pty Ltd, we are able to provide advice on the funding and establishment of the various trustee entities.