There is no doubt that the recent changes to superannuation in Australia have made super the most effective way to minimise tax and maximise assets in retirement. Why is this so? There are several key reasons.

For starters, all payments to members after age sixty are tax free. Super is now accessible from age 55 without the need to stop working via a transition to retirement pension. Super fund earnings (both income and capital gains) on investments used to pay a member’s pension are tax free. The upper limit to pension payments has been removed and Reasonable Benefits Limits have been abolished.

Many people are now turning to self managed superannuation funds (SMSF) so they can tailor their super to meet their precise needs and in many cases, save large amounts of tax. Self managed superannuation is especially popular with those who own their own business and wish to sell their business property into the fund – enabling them to free up cash flow.

The deluge of information available regarding super can be quite confusing for someone trying to decide whether to go with an SMSF. Although running your own superannuation has many attractive benefits, the undertaking shouldn’t be approached lightly. It’s important to understand how self managed superannuation works and what additional benefits it can provide before you take the plunge. For many people, the biggest concerns surrounding self managed superannuation are cost effectiveness and control over investments.

When is self managed superannuation cost effective?

It can depend, but ultimately the answer will depend on the costs charged by your current funds. As the costs charged by commercial funds vary widely, you should first find out exactly what you are paying in your existing fund.

A decent amount of money is required to make an SMSF financially viable, as the costs of managing it can run into the thousands per year. And spending valuable time choosing good investments, only to use the return on the administrative costs of the fund is not a desirable outcome. For example, due to the heavy regulations and complex administration of SMSFs (also true of commercial funds), trustees are looking at minimum accounting and audit annual costs of approximately $1,650 per year. Generally speaking, this indicates that self managed superannuation is cost effective when the fund balance is over $175,000 to $200,000. That said, most SMSFs are set up with a minimum of around $200,000. Currently, the average size of an SMSF account is greater than $580,000.

The cost effectiveness of an SMSF also depends on the type of investments chosen. If investment products similar to those used in a commercial fund are chosen in an SMSF, trustees end up paying relatively high fund management fees for something lacking personalisation.

Will I have full control over the investments?

Determining the fund’s investment strategy is just one of the things running your own SMSF allows you to do with a high degree of flexibility. A fund’s trustees are responsible for the all decisions made in relation to the fund, and they are able to implement a tailored mix of investments to suit their needs precisely. This is a deciding factor for many people who are considering an SMSF.

However, while many people are attracted to this sort of flexibility and control, the work and responsibility involved in setting up an SMSF should be considered thoughtfully as the decisions of the trustee will affect how well the retirement funds grow. Many seek the help of a professional, but ultimately the decisions rest with them.

An SMSF will allow you to purchase investments that commercial funds can not – for example real estate. You can also decide when to sell those assets to minimise tax and maximise the growth of your retirement nest egg. For instance, in a commercial superannuation fund, investments are being bought and sold automatically each day in a one-size-fits-all manner. As a result, members of commercial funds are exposed to capital gains tax. However in an SMSF, trustees sell investments when they are ready to, and so if this occurs after pension age, they are exempt from capital gains tax.

The real benefit of control comes from structuring super so that it is integrated into an individual business and/or retirement plan. There are many ways that an SMSF can be tailored to meet individual needs. Identifying what can be done and which options will return the best results for your individual situation allows you to gain the real advantage of having control.

How should setting up and running a SMSF work?

Self managed superannuation requires an investment in time on the trustee’s part. New trustees should first spend some time researching available investment choices and the nature of risk that is associated with each choice before establishing a fund. The outcome of this process is a written investment strategy that will guide all investment decisions made by the fund.

Once the investment strategy has been established, the trustees then identify individual investments that will make up each investment type. Once the investments are in place, they need to be periodically reviewed to ensure that they continue to meet objectives. The trustees, together with their accountant, should also review their overall position regularly to make sure that the fund is realising its full potential.

The trustees need to maintain meticulous records of decisions and transactions to meet reporting obligations. One of the most effective ways of doing this is to keep records updated quarterly so that record keeping becomes a regular routine.

Getting advice and help

Almost 600,000 Australians have or share in around 300,000 self managed superannuation funds and that number is growing constantly, with one or two thousand SMSFs being set up every month. Clearly the SMSF is an escalating trend and the benefits of managing a super fund are not lost on those who accept the responsibility of doing so. Being able to run an SMSF effectively and competently is likely to bring great satisfaction to trustees and a large number of those running effective funds employ the help of a specialist accountant.

The superannuation specialists at GiffardSim Accountants are able to provide up to the minute advice on SMSF rules and changes and can guide you through the process of setting up a fund, running it and choosing investment strategies. An investment in time is crucial to the effectiveness of an SMSF. With appropriate time and consideration you can ensure your investments meet the goals you want to achieve. If you would like to discuss how an SMSF would work for you and how it could be a part of your overall financial planning, contact one of our specialist accountants at GiffardSim Accountants.