What are the benefits of SMSFs (DIY Superannuation Funds)?

Do it yourself (DIY) superannuation funds have become a powerful wealth creation tool enabling Australians to maximise their assets and income in retirement. And there are a number of benefits associated with setting up DIY superannuation funds and holding your investments inside the Fund.

The benefits outlined below are in some cases specific to holding your investments through an SMSF, as well as those generally that apply to superannuation as an investment vehicle.

1. Low taxation fully sanctioned by the Government: the Government provides generous taxation incentives for people to become self-funded retirees. Superannuation provides a great opportunity to simply reduce the taxation burden in people's retirement lives. For example the tax-free nature of private pensions and lump sum arrangements for members post age 60 is one of the highlights of the Simpler Super reforms.

    

2. An SMSF lets you look after your family: for the majority of people their family is the most important aspect of their lives. An SMSF can provide members with an opportunity to lay down the foundations to provide a comfortable retirement income stream for their spouse and in some circumstances their children. The opportunity has been increased with the Simpler Super reforms where a member can leave the superannuation benefits in the fund until their death.

    

3. Protection from creditors: This benefit is often overlooked by many people. 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 a superannuation fund from creditors. This can be a relief when unfortunate financial events occur.

    

4. Transition to retirement: attaining preservation age, currently 55, members of a superannuation fund have the unique ability to access their superannuation benefits as a pension whilst working. From age 55-60, the pension will form part of the member's assessable income; however the taxable portion of the payment will attract a 15% tax rebate. From age 60, pension income will be tax free. Therefore employees aged 55 or over, small business owners, professionals may be able to access tax-effective income whilst working. At the same time they may contribute their pre-tax salary or business profits into their SMSF (subject to certain limits). This means that if they can set in place a 'transition to retirement' pension as their key source of living expenses while contributing salary to SMSF, a reduction in overall personal taxation may arise.

    

5. Offering a financial helping hand if your health deteriorates: Health is one of those things that can never be taken for granted. So if an individuals health declines, they need to access a safe, secure income that takes the financial worry out of becoming seriously ill or even incapacitated. A superannuation fund can allow members access to a range of benefit options in times of sickness and ill health. This is even the case for sickness of a temporary nature.

    

6. Providing a secure income: one of the major reason for establishing a superannuation fund is to ensure that, when an individual stops earning income, they will have a stable, secure alternative to keep the lifestyle that he or she is accustomed to. A superannuation fund, including an SMSF, may have a range of income options that can be tailored to a member and their family's lifestyle in retirement.

    

7. Investment choice: most members or families in SMSFs want to have some say as to how they invest their money - including their superannuation. The power of choosing investments for the SMSF resides with the trustees, however care needs to be taken to ensure that the trustee meets the relevant superannuation laws in terms of investment choice.

    

8. Looking after your family when you die: an SMSF can be a flexible, targeted and tax-effective vehicle to provide lump sums or income streams to a member’s spouse and/or eligible children when the member dies - and it lets the members control the process. Importantly a member's SMSF estate planning strategy resides outside the member's will. This is not known to many SMSF trustees who forget to put in place an SMSF estate plan and are thereby missing out on highly valued taxation concessions and are also opening the deceased member’s benefits to legal challenge and in some cases, the Public Trustee.

    

9. Superannuation contributions splitting: under the laws it is possible for the member of a superannuation fund to split their benefits with their spouse. The advantage of this, where both spouse members of the fund are between age 55-60 and using transition to retirement strategy, the benefit of the 15% tax rebate are maximised. Further when one member is older and thus will reach the tax free pension status before the other, then it may make strategic sense to split any contributions for the younger spouse to the older spouse.