If you’re considering setting up a self-managed super fund (SMSF), one of the big things you’ll be wondering is what will make the best investment.
But what the “best” investment is for a SMSF is relative; it changes depending on the person, their situation, and financial goals.
In this article we discuss how to approach investing in your SMSF, so you can make the right choice that sees you make the best investment for your situation.
Thinking about setting up a SMSF? Contact a Liston Newton Advisory SMSF specialist today to discuss your investment options.
In simple terms, your self-managed super fund is just that: a superannuation fund that’s managed by you. So instead of putting money into an industry or retail super find, your direct it into your SMSF instead.
It means that you’re the one in control of choosing your investments, and your insurance — you control every single element of your super.
Unlike your typical public super account, your SMSF is able to have up to four members, usually friends or family. You can choose to have each member as a trustee of the fund, or you can nominate a corporate trustee instead.
A better way to make investments
One big benefit of your SMSF is how you’re able to make investments. You’re able to invest your super funds in ways that aren’t available to larger funds.
And, as you’re the one in control, you’re much more agile in your investing, and you’re not bound by the red tape of large public funds. This flexibility means you can buy or sell assets quickly, changing your investments or asset allocation within your portfolio.
How you can invest your SMSF
With an SMSF, you can choose to invest in a broad range of asset classes, including:
- Australian and international shares (listed and unlisted);
- residential or commercial property;
- cash and term deposits;
- fixed income products;
- physical commodities;
- property; and
But this doesn’t come without its risks. We recommend speaking with your SMSF adviser to discuss which assets will be the best investment for your financial goals.
What are the best investments for my SMSF?
The answer to this depends on your age and financial goals.
For example, if you’re aged between 30 and 40, it may suit you to invest in residential property. This usually produces significant capital gains over the long term, between 20 to 30 years. While the drawback to this option is that the income is relatively low when compared to other investment options, this isn’t the entire goal.
Once you turn 60 your SMSF becomes a tax-free entity. So selling this property produces a larger net gain, and they can direct this money to income-focused investments as they approach retirement.
This strategy may not be appropriate for someone in an older age bracket.
As people approach retirement, and need to rely more on income, generally the best investments are those that pay a reliable, strong annual income. This may be fully-franked blue chip shares, where the franking credits can be refunded when tax is lodged. Or it may be another option, such as a bank hybrid security investment that pays a fixed-interest amount.
Focus on your investment strategy
At the end of the day, the best investments for your SMSF depends on your objectives. The outcomes you’re looking to achieve will usually be dictated by your age, and the lifestyle you wish to live.
While we can’t categorically state what you should invest in, and how much, there are usually three main objectives for your investments.
Receiving regular payments through income-generating investments
Some people choose to invest their SMSF in more conservative asset classes that provide regular income payments. This typically takes the form of interest, or income distributions. While these types of assets generally show little-to-no long-term growth, their returns are enough to provide a steady cashflow to fund the lifestyle you’re after. If you invest correctly, that is. This steady cashflow is important to a diverse portfolio.
Building your wealth through capital growth
If you’re considering long-term investments, you should consider an asset class that will increase in market value over time. This is particularly useful if you’re looking to pass on wealth to the next generation. Capital growth assets generally provider a higher return than a defensive asset class, but given their long-term status, you should prepare yourself to experience periods of higher volatility. You may even experience loss of capital.
Managing risk and preserving your capital
Some people see the end goal of their SMSF to secure and protect their lifetime savings. However, when drawing closer to retirement age, or when managing your SMSF during your retirement, this becomes a tangible investment option. This is achieved by focusing on low-risk investment options, such as term deposits or bonds. These deliver lower returns, but have much less volatility, effectively shielding your hard-earned funds from market losses.
How can I use my SMSF to get better returns in my business?
For a business owner, one of the smartest investment options for your SMSF can be the commercial property from which your business is operating.
Your SMSF is a separate entity to your business, so you can legally purchase this property through your SMSF then lease it back to your business. Your business is then able to claim a tax deduction on the lease money paid to your SMSF, which in turn goes towards building your retirement balance.
You can choose to hold the investment and continue to receive the lease income after you retire. Or, once you reach 60, you can sell it free of any capital gains tax.
Haven’t got a SMSF? Here’s why you should consider one
We'll be honest: we don’t recommend setting up a SMSF for anyone whose super fund is less than between $250,000 and $500,000.
This is due to the fees. Where public super funds use a percentage fee structure, a SMSF typically feature a flat fee structure. So the more money you have in your fund, the better of you’ll be.
SMSF fees typically start at $1,800 + GST for a simple SMSF, and range up to $4,500 + GST as it gets more complex. Then you pay the annual ATO SMSF Levy of $259, and the costs for a regular independent audit (usually $300 to $440 each time). These costs add up, and can eat away at your funds if your balance is on the lower end.
But the benefits of a SMSF far outweigh the negatives. You get:
- Better investment control
- A wider choices for investments — you can even indulge in your passion projects
- Improved transparency, as you have better visibility over your investments
- Better tax control, as you can structure your investments to minimise your tax
- Quick and easy access when it’s time to retire
- More control over your estate planning, when compared to a public super fund
A SMSF puts you in control. But a little guidance doesn't hurt. So if you’re thinking about starting investing in your SMSF, speak to your SMSF adviser today.