Can I Buy Property With My Super?
Superannuation is a tax-effective long-term investment vehicle, designed to provide financial benefits in retirement. It operates on a contribution system, with employers mandated to contribute a percentage of their employee’s earnings into their super fund. Additionally, individuals may have the option to voluntary contribute to boost their retirement savings.
Types of Superannuation Funds
There are four main super fund categories:
1) Industry
These funds were originally designed for workers in specific industries, but now most are open for anyone to join. These funds are generally profit for member funds, which means profits are put back into the fund.
2) Retail
Retail funds are usually run by banks or investment companies and are generally run for profit and often have a wide range of investment options.
3) Defined Benefit
A defined benefit fund is based on a formula, and the amount received at retirement is calculated rather than by investment returns. These funds are not as common anymore and are being phased out.
4) Self Managed Super Funds (SMSF)
Individuals who want more control and flexibility with their super can run their own super fund. This involves more responsibility and administration requirements compared to the other funds.
Investing in Property Through Superannuation
Whilst it is possible to buy property through superannuation, it’s not a simple solution, it’s not suitable for everyone and there are important considerations to be aware of.
1) Structure
At present the structure to allow for purchasing an investment property with superannuation is a SMSF. An SMSF is a complex structure which requires careful planning, additional set up cost and ongoing administration requirements.
2) Compliance
The SMSF structure must adhere to strict regulations when investing in property. If breaches occur the consequences can be severe, and penalties can be imposed.
4) Property Restrictions
There are restrictions on property acquired through the fund, for example members or related parties cannot live in the property.
Whilst purchasing property through super can be a strategy for some individuals, it’s not a strategy that is right for everyone. It’s crucial to approach with careful consideration, seeking professional advice and conducting thorough due diligence.
Risks and Challenges of SMSF Property Investment
1) Liquidity
Property investments are not easy to sell. If an SMSF needs access to funds quickly, property may not offer the same liquidity as other investments.
2) Market Fluctuations
Like all property investments, property held within super is subject to market changes. A downturn in the property market could impact the SMSF’s balance and potentially affect the retirement goals of the members.
3) Complex Compliance Requirements
SMSF’s have strict rules, especially when it comes to property investment. Failure to comply with these rules could lead to penalties, making it essential to stay informed and manage the fund carefully.
4) Costs
Setting up and maintaining an SMSF can involve higher costs than traditional industry and retail funds. This is due to the initial set up fees, ongoing administration and compliance costs. SMSF’s can require a significant balance to be an appropriate strategy.
FAQs: Common Questions About Buying Property With Super
Can I buy a home with my SMSF to live in?
No, SMSF properties cannot be used for personal use by the trustees or their family members. Remember, an SMSF must be run for the sole purpose of providing retirement benefits for the members.
Does SMSF property impact retirement withdrawals?
Since property is less liquid than other investments, yes it may impact on how easily members can withdraw funds when they retire. It’s also important to note that in pension phase a minimum percentage drawdown requirement must be met for the balance, so the fund may need liquid assets to meet this requirement.
What if the property value decreases?
Like all investments, property values can fluctuate. If the value of the SMSF property declines, it could impact the fund’s overall balance and affect the members retirement goals and when they can retire.
Could a single property investment increase the overall risk of my SMSF?
Yes, a single large investment in property can lead to concentration risk, where too much of the funds capital is tied to one asset class. This can impact your super if property values decline or don’t perform as anticipated over time.
After working as an advisor for a decade, Joel founded Unified Wealth.
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