We are going to look at the ten benefits of a SMSF, remember our goal is to make things simple – but with thousands of pages of laws it is my recommendation that you find a great SMSF adviser to help you put your ideas and strategies, along with their input, into practice.
Benefit One: A Self Managed Superfund lets you look after your Family
For the majority of people, their family is the most important aspect in their lives. I don’t know about you, but I love my kids and it is great to see them grow and blossom in this marvellous world we live in. Stressful yes but filled with opportunity. And as their Dad I take my responsibilities, particularly financial very seriously. I have made sure that if something happens to me, they are well looked after, but more importantly, protected from financial predators – parents if you get my drift. Bloodline protection the whole way down the line. Now that is a real Family SMSF Estate Plan and erupts from my Family SMSF if I die.
In this way, a SMSF provides members with an opportunity to lay down the foundations to provide a comfortable retirement income stream for their immediate family and possibly generations to come. This opportunity has been increased with the Super Reform proposals where a member of a SMSF can leave their superannuation benefits in the Fund until their death.
Benefit Two: Providing a Secure Income in Retirement
The major reason for establishing a SMSF is to ensure that, when an individual ceases work or business, they will have a stable, secure alternative to keep the lifestyle that they are accustomed to. That income stream, if it comes from super is called a pension and is a very popular strategy for SMSF members once they retire. The big benefit is, if the member is over age 60 when receiving the pension then the pension income is tax free in the hands of the member. Moreover, if this is a member’s only source of income, being tax free they will not have to lodge a personal tax return. Can you imagine that? Being out of the Commissioner of Taxation’s clutches for the first time in your life. Plus, the Trustee of the SMSF paying the pension will not pay tax on income or capital gains earned on pension assets in the Fund.
Benefit Three: Offering a financial helping hand if your Health Deteriorates
Health is one of those things that can never be taken for granted. I know as 2016 was a bad year for my parents and myself. Old age and dementia hit my dad, stress my mum and myself, and well it was good to put it behind us. But knowing that when the chips are down, we can use the SMSF along with health insurance is a blessing.
So, if an individual’s health declines, he or she needs to have access to a safe, secure income that takes the financial worry out of becoming seriously ill or even incapacitated. A SMSF allows members access to a range of benefit options in times of sickness and ill-health. This is the case even where the sickness is of a temporary nature. Temporary and Permanent Disabilities inflict great change and superannuation benefits are able to be accessed during these times of trouble.
Benefit Four: Investment Choice
The large majority of people or families who find their way into SMSFs want to have some say as to how they invest overall wealth including their superannuation. As Trustee of a SMSF, the power of choosing investments for the Fund resides with the Trustee; however, great care needs to be taken to ensure that the Trustee meets the relevant superannuation laws in terms of investment choice. These laws include the need to draft and successfully implement an investment strategy as well as ensure that, within confined limits, no asset of the Fund is used by a member of the Fund, their relatives or any entity related or closely associated with them or their family. But the choice of investments is broad – residential investment property, commercial property, shares, government bonds, gold, overseas investments, start-ups, Early-Stage Investment companies, syndicates and the list goes on.
Benefit Five: Low Taxation fully sanctioned by the Government
Taxation in Australia is significant, but the Government has chosen to save on future welfare payments by providing tax incentives for its people to become self-funded retirees. And particularly given that employees are forced to transfer over 9.5% of their salary into their choice of superannuation – self funded retirement is a goal for most employees. Members of SMSFs have the best opportunity to simply reduce the taxation burden in their retirement lives. For example, the tax-free nature of a private pension and lump sum arrangements for a member of a SMSF post age 60 is one of the key benefits to a secure lifestyle retirement income.
Benefit Six: Looking after your Family when you Die
The SMSF is by far the most flexible, most targeted and most tax-effective vehicle to provide lump sums or income streams to a member’s spouse, children, or grandchildren when the member dies – and it lets the member control the process without fear of legal challenge. Importantly where a member puts in place a strategic SMSF estate planning strategy, it resides outside the member’s will. This is not known to many SMSF members, and Trustees who forget to put in place an SMSF estate plan are missing out on highly valued taxation concessions, and opening the deceased member’s benefits to the lawyers and in some cases the Public Trustee.
Benefit Seven: Access to the Age Pension
The Age Pension is available for persons over age pension age – currently age 67. However, it is subject to an Income and Assets test. A member’s benefits in a SMSF once a member reaches age pension age are generally included for Assets Test purposes, as is income withdrawn from the Fund. Changes to the Assets Test have seen a drastic reduction in the Assets Test limit, but for many SMSF members with less than $986,500 who have a family home (exempt from the Assets Test), they may be entitled to an age pension. In addition, they may be entitled to other important benefits including the Health Care Card but as this is a complex area, specialist financial planning advice should be sought.
Benefit Eight: Protection from Creditors
This is a sleeper and, for most people, is not used at all. However, where a person gets into serious financial difficulty, the Government has provided rules in the bankruptcy laws that broadly protect a member’s benefits in the Fund from creditors with the exception of any retirement income. This can be a relief when unfortunate financial events occur.
Benefit Nine: Transition to Retirement Income Stream (“TRIS”)
The biggest bug bear for most people when it comes to compulsory superannuation is not having access to their super until they retire. There are several exceptions such as temporary and permanent incapacity, certain compassionate grounds, and financial hardship.
One important exception introduced in 2005 was the Transition to Retirement Income Stream. The TRIS enables a working member of a super fund, who has reached their preservation age to access their superannuation as an income stream. The TRIS requires the member to withdraw at least 4% of their TRIS account balance each year and no more than 10%.
From a tax perspective, if the TRIS is received when a member is under age 60, the TRIS income will form part of the member’s assessable income – however it will attract a 15% tax offset. From age 60, any 60 any TRIS income from a member of a SMSF will be tax free.
Benefit Ten: Superannuation Contributions Splitting
Under the laws, it is possible for a member of a superannuation fund to split their benefits with their spouse. Spouse includes a de facto spouse under the superannuation laws. The advantages of this are where both spouse members of the Fund are between the ages of 55-60 and using the transition to retirement strategy, then the benefits of the 15% tax rebate is maximised. Further where one member is older than the other and will thus reach the tax-free pension and/or lump sum status before the other, then it makes strategic sense to split any contributions for the younger spouse to the older spouse. However, it is only the employer or deductible superannuation contributions that can be split and then to a maximum of 85%.
A SMSF offers numerous benefits, including family financial security, tax advantages, investment flexibility, health protection, estate planning control, access to government benefits, creditor protection, and strategic contribution splitting. Consulting an SMSF adviser is recommended to make the most of these advantages and secure your financial future.