SMSF market hits $539 billion

SMSF market hits $539 billion

Australia’s booming self-managed super fund (SMSF) sector shows no signs of slowing – it’s the fastest growing sector of the Australian super industry, and in dollar value equates to three times that of New Zealand’s gross domestic product.  

There are currently over 500,000 SMSFs holding a staggering $539 billion in assets, according to the latest Australian Taxation Office (ATO) figures. This makes SMSFs a significant investment player – making up a weighty portion of the $1.6 trillion currently sitting in superannuation.

The latest ATO figures show Australians are now, more than ever, choosing to manage their own personal investments through SMSFs.

James Austin, CFO of market-leading Australian financial services provider Firstmac Limited, said, “Many people appreciate the flexibility and control SMSFs offer for investing directly into residential or commercial property and the opportunities for gearing.”

“This was particularly evident during historic periods of stock market volatility when super fund balances were in decline and investors sought greater control over decision-making.”

What’s the attraction?

“SMSFs provide a way to invest differently than is generally available through a larger, managed fund. They can achieve lower costs than many large super funds and offer the ability to effectively manage or eliminate Capital Gains Tax (CGT),” Austin said.

“Through a SMSF, people can often purchase assets they could not afford otherwise. Up to four people, commonly family members, can pool their resources. It also allows for greater flexibility in estate planning.”

Austin said the government incentives and tax breaks are also attractive, in particular for small and medium enterprises (SME).

“SMSFs hold particular appeal among SME owners as a way to hold their business premises for tax advantage, asset protection, succession planning in family enterprises, and security of tenancy. Self-management also allows for rapid sale or purchase of assets and the ability to change asset allocation of portfolios,” he said.

The government currently offers a number of SMSFs incentives including a 15 percent tax rate for accumulating assets, no tax on the earnings of assets generating a pension and in most Australian states they also offer stamp duty concessions.

But Austin warned despite the advantages, SMSFs aren’t without their disadvantages or risks.

“They can be time consuming and require a level of investment knowledge that cover at least the basics of sound financial management including the mechanics of the stock and property markets, and economic influencers,” he advised.

“There are penalties for non-compliance so people establishing a SMSF also need to familiarise themselves with their legal obligations.

“There is also a risk of poor diversity as, commonly, SMSFs are established with the aim of purchasing a single valuable asset, such as commercial real estate. This could leave the fund exposed should this market sector experience a sharp decline. Also, SMSFs with a small balance can attract more expensive fees than those of larger managed funds.”

Arian Neiron, Managing Director of Market Vectors Australia, also points out that SMSFs should take action to avoid poor real returns on cash investment which represent almost 30 percent of all SMSF assets.

“SMSFs should consider diversifying their investments with ETFs (exchange traded funds) to build their wealth over time, rather than seeing the value of their cash eroded by tax and inflation,” he said.

If you are considering managing your own investments through superannuation you should consult an industry expert for advice, as well as conduct your own research to see if it’s the right investment option for you.

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Do I have to claim interest on my savings account?

When you lodge your income tax returns, you must include in the documentation all your sources of income, including bank interest. Your bank will report any interest you earn on the funds in your savings account to the Australian Tax Office (ATO). When the ATO then compares this information with your tax returns,  you also need to have mentioned the interest earned. If there is any discrepancy, you’ll receive a letter from the ATO. 

Avoid this situation by ensuring you receive your bank statement with interest noted. Then declare the interest in your tax returns and pay the tax that’s applicable based on the income tax rate.

You only need to claim your share of the interest earned for joint accounts. If you manage an account for your child and receive or spend money via this account, you will also need to report any interest earned from said account.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.