Investing through your SMSF can turn out to be a lucrative venture and if you are spot on with your declared investment strategy, you can reap great many benefits over the short and the long term. However, everything in life for which the word ‘lucrative’ rings true is also beset with traps. Let us figure out the top traps of SMSF-enabled investments.
Within the ambit of this article, let me field a few pertinent SMSF questions.
More and more property owners are waking up to the immense possibilities that the SMSF-enabled property purchases bring to the table. Investment in such properties can pave the road for long-term capital growth. But you can work out a smart short-term gain, too, if you change your stance from ‘investing’ to ‘developing’ or ‘improving’ the property.
Will my money outlast my working years? This is a question bothering many of us. The dilemma forms a core of our society; the inherent fear that we may have to live on nearly nothing once we are retired. There is good reason to assume so and the precarious footing on which Baby Boomers find themselves today only strengthens the argument.
A majority of Aussies feel they won’t be able to outlive their retirement fund. This sentiment comes in wake of a lot of flak that the baby Boomer generation and their carefree attitude has faced over the last year or so.
While single bank accounts seem lucrative, they are beset with quite many traps. Unless you comprehend the risk-benefit equation properly, there is no point venturing further. SMSF practitioners would definitely have felt relieved when the ATO declared that they could hold segregated pension assets even within a single bank account.
Drawing a pension from your SMSF
This is probably the moment you’ve waited for and probably the reason why you got a SMSF (self-managed super fund) in the first place. By the time you reach the age of 55, you can already start withdrawing money from your fund. But for some people, retiring on a super pension means never having to pay taxes again.
You can start a super pension the moment you satisfy a condition of release, like retirement, TPD or temporary or permanent disability, or financial hardship. You can also start a pension within the years leading up to the age of retirement the moment you reach the preservation age, which is 55 years. Now, SMSF have members in pension phase and some are in accumulation or pre-retirement phase, but there are also members that are in both phases at the same time.
Once your individual balance is in pension phase, you can no longer make contributions to that account, but some SMSF members have an accumulation account they can make contributions to and a pension account to withdraw from at the same time. This is easier to identify which account is tax free.
Types of pension
You can start with an account-based pension if you’re over the age of 65 or between the ages of 55 and 65 but retired. If you’re between the ages of 55 and 65 but you’re not retired yet, you can switch on an income stream with a transition to retirement pension (TT).
Account based pension is the most popular form of super pension, though there are restrictions on the amount you can withdraw from every year. Even with the withdrawal amount, there’s no upper limit on how much you can access or when. You can even withdraw lump sum amounts.
TTR or transition to retirement pension: If you’re between the age of 55 and 65 and you want to continue working full time or part time, you can withdraw up to 10% of your super balance every year. Like the account-based pension, there’s a minimum annual withdrawal of 4% from July 1, 2013 and no restrictions on the timing of payments.
By the time you reach 65, it’s a simple process to convert a TTR to an account-based pension. An even better deal is by the time you reach the age of 60, all the withdrawals from your funds including lump sum are tax free. There is also no tax to pay on any income or capital gains from assets supporting the pension. This gives you the advantage to supplement your wages with tax-free pension income while increasing your super balance at the same time.
You can also maximise the tax benefits of such a strategy by salary sacrificing your super contributions from your pre-tax salary.
And to top it all off, if you’re fund is in pension phase and holds fully ranked shares, the ATO or Australian Taxation Office will send you a refund cheque every year.
Superannuation savings of Australians have had the biggest quarterly returns in three years.
The March quarter saw median balanced funds (60 to 76 per cent invested in growth assets) recorded returns of 5.7 per cent, noted as the best quarterly increase since March 2012 (a time when funds climbed to 5.8 per cent)/
The strong returns are due to the climbs to the international and domestic sharemarkets. The falling Australian dollar also contributed to the increase in returns on international equities.
Coincidentally, this marks the third consecutive year where the superannuation returns recorded with double digit growth for the first time since the global financial crisis.
The figures released by SuperRatings, a superannuation research firm, showed that super funds grew by 1.9 per cent in January, 3 per cent in February, and 0.6 per cent in March of this year. This amounts, or rounds up, to 5.7 per cent in returns within three months.
The ASX200 index increased by 10.3 per cent in the March quarter and helped to boost the returns.
Jeff Bresnahan from SuperRatings states that Australians should be thrilled with the returns but cautioned citizens that a good run may come to a halt any time soon.
Bresnahan also states that Australia is likely to have another strong financial year, given that the country is more than 75 per cent up on where we were when the GFC (global financial crisis) happened. The sharemarkets could come back by up to 10 per cent and could affect super returns, but the effect wouldn’t be significant.
The returns on super accounts ar at a 10.8 per cent for a financial year-to-date and in the past year, members have enjoyed gains of 13.1 per cent.
Brendan O’Farrell, Intrust Super chief executive officer, said that Australians should be pleased with the returns but should be ready when the returns come to a halt.
Losing sight of the many uncertainties can reverse some of the strong gains, O’Farrell said. He also reminds that with long-term investments, investors should be ready for bumps along the way.