There are over 560,000¹ Self-Managed Super Funds in Australia, many of which could benefit by following a few simple steps listed below by our Financial Advisor Mooroolbark from CLY Financial Planning.
While many of these SMSFs are running smoothly, many others could benefit from some fine-tuning to ensure the best interests of members are being looked after.
3 Tips for SMSF
1. Diversify
SMSFs give you greater freedom around how and where you invest your Retirement savings. But with that freedom comes the responsibility to ensure there’s an appropriate balance of Investments to meet the objectives of the fund.
For most people, a smart way to manage the risks of investing is to include a mix of growth assets (e.g. shares and property) and defensive assets (e.g. cash and fixed income) in your portfolio – ensuring you’re not too exposed to any one asset class in particular.
The need to diversify also applies within asset classes. For example, while SMSFs are heavily invested in Australian shares (31.7% of total assets at June 2015²), few are invested in international shares (0.3% of total assets). This bias not only increases risk, it can also hinder growth. In the year to 30 June 2015, international shares (+25.2%) significantly outperformed Australian shares (+5.7%)³.
Exchange Traded Funds (ETFs) can be a cost-effective way to add diversification to an SMSF, with some ETFs able to give you exposure to an entire asset class in a single investment.
2. Avoid a liquidity trap
The ability to buy real property in super is one of the popular attractions of SMSFs. The downside of owning large assets like property inside your super is the problem it presents if your fund needs to pay out one of its members – e.g. due to death or permanent disablement.
In this situation, an SMSF trustee may be forced to sell the asset quickly to pay a member’s benefit. This could result in an unfavourable outcome for all concerned.
One way to potentially avoid this is to ensure the SMSF holds a significant amount of cash and other liquid assets (e.g. shares and ETFs). Life insurance may also have a key role to play (see # 3).
3. Consider life and TPD insurance for members
Unlike some employer super funds, life and total and permanent disability (TPD) insurance isn’t compulsory in SMSFs. However, trustees must consider the need for insurance as part of their investment strategy, and this needs to be documented.
Taking out life and TPD insurance can be a smart way to protect the members of your SMSF as it allows you to use before-tax super contributions (e.g. salary sacrifice) to pay insurance premiums. While there are pros and cons of holding life insurance within super, it may make your cover more cost-effective than if you held it outside super.Self
Chirnside Park Shopping Centre
If you are interested in SMSF advice or want to know more, please contact our Financial Advisor Chirnside Park at CLY Financial Planning for a free SMSF consultation appointment.
Source:
- http://www.apra.gov.au/Super/Publications/Documents/1511-QSP-1509.pdf
- http://www.superguide.com.au/smsfs/smsf-investment-diy-super-asset-types
- https://static.vgcontent.info/crp/intl/auw/docs/resources/index_chart.pdf
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