According to the ATO, “gaining control” is the most powerful motivation for starting a self-managed super fund (SMSF).
More than 50 per cent of fund holders also believe their SMSF can outperform their previous institutional holding. For those looking for safety in retirement, it can be reason enough to delve into the activities of your retirement savings.
But what are the biggest SMSFs doing to make their investments work harder? And are the biggest funds in Australia outperforming those that haven’t nailed their strategies?
Investing in property with a SMSF
One of the biggest trends for SMSF holders is to borrow within their fund to acquire property. And it’s expected to rise, with the ATO recently clearing up some grey areas in regulation. Properties on multiple titles are now an option for SMSFs, and funds can now drawdown on a loan to buy. Also, many updates to property are now considered “repairs” and not “improvements”, which were previously banned under SMSF restrictions.
ATO statistics show that SMSFs have less than a quarter of their $58.9 billion direct property investments in residential property. This could be because fund trustees are looking for higher yields to service investment loans on geared properties. However, low volatility on residential property as well as long-term capital gains can also be attractive on residential property. An innovative strategy has been for couples to buy their future retirement homes within their SMSF for retirement savings, tax and lifestyle.
Keeping costs down
Those starting out in a SMSF may learn a lot from the way the high-asset funds are run. Last financial year, SMSFs with more $10 million were run at an average cost of 0.25 per cent of assets, while the $500,000 to $1 million funds cost around 0.67 per cent. On the other hand, those with less than $50,000 in assets were forking out 7 per cent and running at a loss. Stick to starting a SMSF with $200,000 or more and watch your administration fees. Well-run funds are wary of triggering capital gains tax as well as transaction costs through excessive trading.
Those with the wealthiest funds typically ensure family members put in as much pre-tax contributions as possible. This includes anyone under 65 and anyone aged 65 to 69 still doing some paid work. From 2012/13, you can contribute $25,000 before tax plus $150,000 in after-tax contributions. This means funds with the maximum membership of four people can still receive up to $700,000 a year.
It’s the most basic of strategies, but the statistics may be surprising. In 2009/10, the smallest SMSFs had 38 per cent of their money in a single asset class compared with the 5 per cent reported from funds with $1 million to $2 million. One returned an average of negative 8.64 per cent, while the bigger funds kicked back 6.87 per cent.
You may need to investigate which strategy suits your SMSF phase. For example, for those not of pension age, it may be better to hold stocks for a year to receive 10 per cent discount on capital gains tax. Also, SMSFs in the accumulation phase receive half their franking credits on fully-franked shares, while members in pension phase collect full refunds. It may not pay to make all investment decisions on a tax basis, but it pays to be aware.
Currently, many baby boomers expect to retire with $400,000 in super half of what they think they will need. Whatever your superannuation and retirement goals are, it may be worth doing the sums to better secure your future. Looking for more ways to improve your retirement savings?