Self-managed super funds (SMSFs) have become increasingly popular in recent years, especially among those in business. But are they all they’re cracked up to be for creating wealth for retirement?
SMSFs have been spruiked as a means of taking greater control over your retirement funds. While there are many benefits, they’re not without their drawbacks.
Consider these pros and cons before determining whether a SMSF is the right option for you.
Pro: asset flexibility
For business owners, one of the main attractions of SMSFs is the ability for their superannuation to own their business premises. The business pays rent back to you (into your SMSF) rather than to a third party.
Down the track, you can either sell the premises once you retire, continue renting the commercial property to the ongoing business, or lease it to a new organisation.
SMSFs can also be useful for diversifying into more unusual or niche investments: think wine, art, classic vehicles, rental properties, physical gold or silver, Bitcoin and even individual shares. These assets are generally not available within industry or retail super funds.
Some accountants spruik SMSFs to everyone under a cookie-cutter approach, although they’re not always required or even beneficial.
The set-up and ongoing costs are greater than many people realise, including accountant fees and auditing expenses. These costs generally outweigh any benefits if you have less than $250,000 in super.
Then there’s the time cost of being an SMSF trustee – and time is something business leaders typically have little to spare.
Surprisingly, some investments are also cheaper in a standard retail fund than an SMSF.
Pro: tax benefits
There can be substantial tax benefits to having an SMSF because earnings aren’t taxed at the same rate as personal income. That difference means more of your investment returns to stay within your super instead of going to the tax office.
Additionally, assets sold within SMSFs when you reach a certain age can be exempt from capital gains tax (CGT).
Con: usage restrictions
We all know that money in super usually can’t be touched before reaching retirement age and SMSFs are no different. However, SMSF owners often get caught out with investment or holiday properties.
If you own a rental or holiday property personally, you can occupy it should you want or need to, and simply cease claiming tax deductions for the time you’re there. However, SMSF-owned properties can’t be used at all by you or your family.
The same goes for sampling an aged wine or having artwork on display in the family home. Also, you generally must reside within Australia to be eligible for an SMSF.
Pro and con: family affair
Business leaders often consider their whole family’s financial position, not just their own. SMSFs allow you to engage your whole family, which is both a pro and a con.
The benefit is that you can buy bigger investments by pooling together your family’s superannuation monies. There is also more flexibility in an SMSF on whether to segment investments; for example, if one person wants to access earlier, you can nominate which investments to take from.
On the flipside though, accessing cash can be tricky when family members need funds at different times due to age gaps, or when relationships break down.
Additionally, those large assets can be illiquid and difficult to sell.
The need for an SMSF
Ultimately, you don’t need to have an SMSF to build wealth. There are alternative structures worth exploring, including trusts, companies and education bonds in addition to industry and retail super funds.
Determining whether an SMSF is right for you will involve weighing up the relevant pros and cons against your investment goals and your individual circumstances.
Remember too that tax and super rules change regularly, so current calculations could be moot if new legislation changes the playing field. Tailored advice from qualified professionals can help guide you through the red tape and ensure your money works hard for you.
Helen Baker is a licensed Australian financial adviser and author of On Your Own Two Feet: Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce: Your Survive and Thrive Financial Guide.
Note this is general advice only and you should seek advice specific to your circumstances.