Self-Managed Superannuation Funds: A cornerstone of family wealth
Since they began in 1999, Self-Managed Superannuation Funds (SMSF) have been a preferred structure for many families to come together and build wealth. With a 15% tax rate on contributions and tax-free once in the pension phase, it is regarded as a beneficial way to diversify and build family wealth.
Until recently, the main barrier to operating an SMSF has been that only four members were allowed within the structure. While this was perfect for families with two children, it was very restrictive for larger families.
But with the change in legislation that SMSFs can have up to six members from 01 July 2021, now might be time to rethink your family's longer-term wealth creation and investment strategy – and explore the advantages of an SMSF.
Recent research through the Vanguard Australia and Investment Trends 2022 Self-Managed Super Fund Survey show that the average age and balance for people establishing an SMSF (between 2020 and 2022) is 46 years of age and $340,000.
NOTE: ASIC recommends a starting balance of $500,000 or more for an SMSF ("The Productivity Commission in its report Superannuation: Assessing Efficiency and Competitiveness found that on average SMSFs with balances below $500,000 have lower returns after expenses and tax compared to APRA-regulated funds.") asic.gov.au
These findings suggest you don't need to be near retirement age or have substantial wealth to start an SMSF.
Stephen Nardi | Superannuation Manager
Your responsibilities within a SMSF
Inside an SMSF, all members must be directors of the trustee company if you choose a corporate trustee structure (the alternative is that each member is automatically an individual trustee).
This means it is important you understand your responsibilities as both a director and a trustee. As much as an SMSF allows broader investment opportunity and flexibility, you need to operate your SMSF within the regulations as you are ultimately responsible for saving for your retirement. It’s a serious responsibility that needs to be understood by all trustees.
In fact, the same Vanguard Australia and Investment Trends research highlighted keeping track of changes in rules and regulations as the greatest challenge of holding an SMSF.
Family governance structures – what does it mean?
Deciding to grow your wealth together as a family may sound like a great idea, but it is important to have family governance structures in place.
You first need some ground rules – family members may not always be in perfect harmony when discussing investments. Each family member may have different risk tolerances or be at different life stages. These considerations need to be discussed and planned for.
If one generation is retiring or entering the pension phase, you need to ensure you have cash available to pay the pension for that SMSF member (in situations like this, you can’t invest all the funds in a geared property).
Many families invest their time and money in good investment advice, but often overlook the family element. When planning and setting up an SMSF, we work with our clients to address the family dynamics as much as the investments.
Make estate planning a priority
When investing together as a family, it is important that estate planning is a priority.
This means not just considering how your spouse and children will be financially protected if the worst should happen, but how you are going to look after your family without undoing the investment strategy that's in place.
When it comes to multiple or blended family units, you need an aligned, long-term plan that looks after everyone’s individual families while still trying to grow wealth as a family.
You can learn more about our approach to estate planning here.
The advantages of an SMSF
- You have control over what you invest in. Owners of recently-established SMSFs (2020 - 2022) sited control as the number one reason (78%) for setting up their own fund1.
- You can implement tax-effective strategies to achieve your financial vision.
- When you have six family members in one fund, the structure becomes a cost-effective option.
- The pooled funds of six family members allow you to dream big.
- It's a viable option to hold residential (rental) or business property in your SMSF asset mix. With six family members' funds and borrowing capacity within an SMSF, this vision can become a reality – especially for families that operate their own business and want to acquire business premises as a family asset.
- An SMSF provides investment flexibility.
1Investment Trends 2022 SMSF Survey
Working with clients
To begin, we work with you to learn about your family vision and financial purpose. Then we work with you to devise a strategy around how we can make your plans a reality.
More than simply setting up your SMSF structure, we also provide education to ensure all family members understand their responsibilities as directors and trustees. In addition to working with your family, we can co-ordinate with your (or our) other professional advisers to ensure your estate plans are aligned and the financial foundations can live on for multiple generations.
The wrap up
The increase in the number of members permitted in an SMSF to six has really cemented its position as a cornerstone of family wealth creation.
Whether you want to diversify your wealth or invest funds outside of the family business, it's possible to bring your vision to life through an SMSF so that your family can benefit for generations to come.