When Self Managed Superannuation Funds make Sense.

For most of us, saving for the future might seem like a challenging task and you’d be right, it certainly is. You’re typically paying rent or paying down a mortgage, paying for food and all the other necessities and then also hoping to go on the occasional holiday so saving for your retirement needs to be done in a careful & methodical fashion.

If you’re employed, you know that your employer is paying 9% (soon to be 12%) into superannuation on your behalf but you also know that unfortunately, managed superannuation funds are notorious for taking large fees and generating very poor returns so it will probably be necessary to save a bit extra to ensure a reasonable quality of living during retirement. Now what is the best strategy for doing this?

Here is a two part strategy that I’d like to propose is especially effective for the vast majority of individuals, especially where there are partners (husband & wife) who can share a single self managed superannuation fund –

1. Recognise that extra superannuation contributions (superannuation salary sacrifice) act as an excellent tax break. This is because superannuation contributions are only taxed at 15%, while a typical tax payer earning more than $35,000 per annum is paying tax on the margin (the margin is anything above $35,000) at a rate of 31.5% to 46.5%, so there is a potential to save between 16.5% and 31.5% on every dollar of sacrificed salary. This means that a sacrifice of $10,000 from your pay (bear in mind you can only contribute up to your age based limit) could save you up to $3150. If you did this for 10 years you’d have saved over $50,000 including compounded interest.
2. Consider running a simple, self managed superannuation fund with a single index fund as the core investment. A financial planner can help you select the index fund that is most appropriate to your risk profile. An index fund is similar to a share in that it is listed on the Australian Stock Exchange and is structured to mirror the value profile and dividend payment stream of an index of equities. Typically the index is structured to meet a particular risk profile. For example, a low risk index fund might be comprised of only blue chip shares that pay dividends. Using a SMSF with this type of investment can save you thousands over the years especially as the value of the fund increases. This is because with a basic self managed superannuation fund, you pay only to have the fund accounts prepared and audited, there is no percentage of the value of the fund charged as is typical with managed superannuation.

If you have more sophisticated investment requirements, Self Managed Superannuation Funds are the perfect vehicles so don’t be put off by the simplicity of the simple example mentioned above.

Here is a list of possible investments that can be put into a SMSF –

1. Property, either commercial or residential. You cannot purchase residential property from yourself or your family nor can you or any of your family members live in the property.
2. Shares & equities listed on the ASX. Direct equity investment is cost effective since you have direct ownership of the equity (rather than via a managed fund) in the SMSF.
3. Overseas shares & equities. It can get expensive to keep these in a SMSF for the simple reason that when it comes time to have the fund accounts audited, the auditor will need to verify the value of the equities held and this will generally take more time than verifying local funds, hence leading to a higher audit fee.
4. Art & collectables. There are special rules and considerations which come into play when getting involved with this type of investment through a SMSF.

Information in relation to setting up self managed superannuation funds -

How much will it cost to set one up? At Noble & Associates we provide fixed price fees for setup services. Typically, expect to pay $880.

How long will setup take? Typically we can prepare the required documentation and secure the various tax file numbers in three to five days. We can also supply you with the information needed to secure rollover of your SMSF monies held by your managed fund.

Will I need a bank account? Yes, we work closely with Macquarie Bank who have excellent SMSF products. We will fill in the paperwork and rebate all reseller fees back to your fund on an annual basis.

Will you help us select the investments for the fund? No, we are not financial advisors so we cannot assist in any way with the types of investments you put into your fund. We do work closely with financial advisors and can recommend an advisor with the relevant product knowledge.

How much will it cost to run my fund on an annual basis? For the basic fund mentioned above, $1,100 for accounting fees, $300 for audit fees and $150 government levy. For funds that have more complex investments or share portfolios the cost is dependent on the type of investment and the complexity.