Australia’s treasury has recently published the fifth Intergenerational Report. Whilst it strongly details Australia’s economic challenges, the report also shines a spotlight on the benefits of owning a property in your self-managed superannuation fund.
Keep reading to find out how accessing an SMSF loan for property now can put you in good stead amongst the increasing proportion of self-funded retirees.
What does the Intergenerational Report have to do with superannuation?
The Treasury’s intergenerational report spelled out two findings that impact how you may look to fund your retirement in years to come.
Australia’s Ageing Population
We hear it time and time again that Australia has an ‘ageing population’ — primarily due to the baby boom era that started in 1946 — so it’s hardly surprising that an intergenerational report raised the point again. But what does it have to do with super?
The pension system. While the report detailed that Australia’s economy will continue to grow (albeit slower than previously anticipated), the impacts of an ageing population will put a hefty pressure on the government’s revenue and expenditure.
Less economic growth and more aged Australians relying on social security and health services illustrate the importance of building superannuation savings. The CEO of the SMSF Association, John Moroney, agrees and says that by building superannuation savings through your super, you can offset the growing liabilities related to the ageing population.
More self-funded retirees & less future fund
Out of the world’s pools of superannuation assets, Australia’s superannuation asset pool is already the fourth largest. The intergenerational report forecasts that it will more than double its percentage of Australia’s GDP by 2061. On top of that, the report also predicts that the Future Fund (responsible for investing for the benefit of future generations of Australia) will reduce down to only 2% of GDP over the same time period.
You might be wondering ‘what is the Future Fund?’ and questioning what it has to do with funding retirement. Australia’s Future Fund is a type of Sovereign Wealth Fund, an investment fund set up by the Government, with the Government’s money to provide benefits for the Australian population. Essentially, it’s the savings account of the Federal Government, set up in 2006 in an attempt to improve the Government’s financial position long term and help pay for things like social security benefits.
The Future Fund comes together as five special-purpose funds with specific investment profiles set up for distinctive objectives. At the end of September 2020, the Future Fund was valued at $163 billion. It’s an impressive figure to have sitting in what is essentially a savings account for the Government, but what’s more impressive is that Australia’s superannuation pool of funds is predicted to double its percentage of our country’s total GDP (in essence, our balance sheet) but the Future Fund will only be worth 2% of GDP whereas it currently sits at 8%.
With less reliance and availability of the Future Fund, and more and more money sitting in our pool of superannuation, it means more retirees will be self-funded in decades to come, with an increasing proportion choosing an SMSF as their primary retirement savings strategy.
How can an SMSF property help me reach a self-funded retirement?
A self managed super fund offers an adept solution for those searching for a much higher level of involvement, control, and flexibility on how their superannuation money is invested. A benefit of greater control and flexibility in investment options means that SMSF owners can invest in the same style of investment options that traditional funds can, as well as some that traditional funds can’t. The ability to invest directly in residential and commercial real estate is one such investment option that, done correctly and with the assistance of SMSF Loan Experts, can elevate your super’s balance at retirement above and beyond what many public funds could.
Whilst property investment that is leveraged by your super represents a superb way to accelerate your retirement savings, it’s unlikely that someone with an SMSF in growth phase holds enough cash to buy an SMSF property outright (and stay on track with their investment strategy). This is where SMSF loans come into the picture.
Benefits of using an SMSF loan to buy property
Above and beyond the standard benefits of property investment such as income potential, capital growth, and possibly less volatility than other investment choices, SMSF borrowing to fund residential or commercial property holds other benefits that aren’t always obvious:
Helping others while helping your super grow
Suppose the property your super fund borrows to invest in is a business property. In that case, you can rent it to a related party business (meaning yours or a family members) and effectively help them while helping you build your retirement nest egg.
Given the intergenerational report outlined the likelihood of Australian’s working for longer due to better career flexibility and our progressive health system, it could very well mean the ability to provide an ideal premises for a personal connection to continue making their financial dreams a reality, too!
Reduced Tax on your Contributions
Did you know that SMSF loan interest is tax-deductible? This can be a real ace card to have up your sleeve when it comes to reducing your total tax liability.
How? When you make a personal contribution to your super fund, you can notify the Australian Taxation Office (ATO) of your intent to claim a tax deduction on the contribution. This reclassifies what would have been an after-tax (non-concessional) contribution into a concessional contribution, which means it is taxed at 15% rather than your marginal tax rate of up to 45%.
Suppose you use that contribution to pay for your SMSF loan repayment. Then, you’ll claim a deduction on the interest of the loan repayment, effectively dwindling down the total tax liability in a financial year.
Less Capital Gains Tax (CGT) payable
While we’re on the topic of reducing your SMSF’s total tax liability, it’s timely to mention that Capital Gains Tax within the self managed superannuation fund environment is generally capped at 10%. Even better is that it can drop to 0% once the SMSF moves to pension phase!
Just as any tenanted residential investment property provides a source of investment income, so too will an SMSF investment property. Most notably, once the SMSF loan has been repaid in full, that rental income can help provide a consistent level of retirement income once your super fund moves into pension phase, without needing to sell off any other SMSF assets.
Low Interest Rates
It’s pretty difficult to ignore the record-low interest rate environment that Australia has been living in for the past couple of years. The low-interest-rateworld of today isn’t over just yet, with the historically low levels sticking around to help ride out the economic hit that Australia took as a result of the COVID-19 pandemic. What this means for you is a prime opportunity to lock in low interest rates and build your equity in your SMSF investment property quicker than ever before.
The bonus here is that by investing in property assets in a low interest rate environment, you can help make up for the slack returns you may be seeing in other types of assets, such as cash or fixed interest.
Expedite the growth of your retirement savings
The upside to borrowing to invest in property within your super is that once you have one property, you can use the income generated from it to provide funds to invest further in the property space. You can even use the cash flow to fund investment in totally different asset classes such as fixed-interest or shares.
Contribute to super for longer, with more members in your fund
If you’re one of the many people looking to use super as your main vehicle to drive into your golden years with, then the government just made it easier to put the pedal to the metal.
Recently, both sides of parliament passed a bill to extend the bring-forward age to 67, and another to allow up to six members in your super fund. This is good news for those Australians that the Intergenerational Report suggests will be working longer into their lives, as they can contribute more into their super, for longer, and without breaching their contribution caps.
And for those looking to invest in property within their self managed super funds? The six-member bill will allow even more of your family to take full advantage of the undeniable benefits of holding an SMSF loan for property investment. Despite the ageing population, the ability for more members of your family to be members of your super fund can help mitigate longevity risk of your property investment or SMSF loan into retirement.
How can SMSF Loan Experts help me meet my retirement goals?
We help the trustees of self managed super funds optimise their loan and lending structure to get the best possible outcome, using the best lending products, smart strategies, and carefully tailored service.
Imagine you could borrow at a competitive interest rate and purchase a high-growth, high yield property. Or imagine your self managed super fund could purchase the building your business operates out of to effectively make yourself your own landlord.