In any discussion about the pros and cons of SMSFs, the most common words in the conversation are 'control' and 'flexibility'.
And these are certainly highly relevant as they are indeed benefits of SMSFs. But control and flexibility aren’t particularly useful in and of themselves. It is what they allow SMSF members to achieve that is actually important.Join our newsletter
Often, control and flexibility are talked about in the
context of investments – those with their superannuation in an SMSF can choose
any investment allowed by the law whereas those with their superannuation in
other funds must choose from a pre-determined list. These days, when the lists of investments
offered by public superannuation funds are so extensive, it’s easy to dismiss this
as something esoteric that few people need or want unless they have an eye on
particular types of investments – for example, those wanting to invest in
private companies, artwork, bitcoin or borrowing to buy property.
These are certainly some of the investments SMSFs can make that other funds tend not to include on their menu. But actually it’s not necessary to go this close to the edge to find benefit in investment flexibility within an SMSF. Other, less well known, opportunities that are often unique to SMSFs are: a specific property even without borrowing, companies that are about to list on the ASX (called “Initial Public Offerings” or IPOs) or new investment products. Think even of the humble term deposit or bank account. In turbulent times such as these, even a modest additional interest rate on a term deposit can make investigating the options worthwhile. The large public fund that holds some of my superannuation does allow me to choose term deposits (many don’t). But I can choose from two banks and that’s it – no shopping around for me.
And this investment flexibility doesn’t stop with the decisions about what to buy. A second massively underrated benefit of SMSFs is the power of 'pooling' (having all members share the assets). Combining can be powerful in so many ways – a simple one that occurs in many couples is that one member will often start taking a pension before the other. The cash flow from all of the fund’s investments (not just the pensioner’s share) are available to finance the pension payments. Even cash flow from contributions for the pensioner or the other member can be used to do this. (Note that behind the scenes, the fund’s accountant is keeping a tally of how much super each person “owns”. If the cash from my contributions is used to finance pension payments to my husband, the accountant will just make sure the records show that I now own a bigger share of the rest of the fund’s assets). Again, in times like these where sometimes not selling assets that have dropped in value is the key, the benefit of being able to make compulsory payments without being forced to sell anything can be significant.
Finally, and perhaps the most important benefit of an SMSF – it is the only true superannuation platform for life.
Most of us will now have superannuation from our 20s until we die so it’s highly likely that many things will change over that time. Who knows? We might choose to have an adviser for some of that time but not all, we may have an adviser who changes their preferred investment platform (which – in a public fund – would mean a change of superannuation fund), the law will change, the best performing funds will become the worst and vice versa, our own needs will change (we won’t care too much about the flexibility of a fund’s pension options when we’re 30 but it will certainly be a high priority in our 60s) and many more. The only fund that can adapt to this change with us is an SMSF. Everything about our SMSF might look profoundly different at 40, 60 and 80 but we’ll have stayed within the same legal structure the whole time.
That continuity is important for lots of reasons but let me provide just one. Anyone with a superannuation pension that started before 1 January 2015 (in any fund – SMSF or public) knows that a key benefit it brings is special treatment for the Commonwealth Seniors Health Card – none of the pension income is counted when it comes to working out if you earn too much to get the card. Switching to a new fund means starting a new pension. The new pension won’t have this special treatment. Superannuation law is peppered with these kinds of special deals for arrangements that have been in place before a law changed (called 'grandfathering'). The great thing about an SMSF is that it’s possible to change absolutely everything – investments, accountants, advisers, auditors, software – without stopping that pension. SMSFs are in the unique position of having the best of all worlds when it comes to grandfathering.
In fact, perhaps that’s it in a nutshell – SMSFs may take more time and require more effort than a public superannuation fund but they do give us one of the few opportunities in life to have the best of all worlds.