What is a Self Managed Super Fund?
A self managed super fund (also known as an SMSF) allows you to manage your own superannuation investments for your retirement.
Setting up your own superannuation isn’t right for everyone, so it’s important to understand the basics and to ensure that you consider the right fund for your unique situation. I often get asked about SMSFs, so I thought it would be worthwhile writing an article about the pros and cons to help inform your decision.
An SMSF is a superannuation fund that you manage yourself
Traditionally, your employer pays a percentage of your pay into a nominated superannuation account. This acts as forced savings, and your super fund invests this money until you retire.
Most people have their super with a fund that is managed by a third party – a fund manager, a large corporation or an industry body. However, you can manage your own super fund in what is known as a SMSF. This means you are fully in charge of where the money is invested.
Most retail and industry superannuation funds let you choose from a range of basic investment options. These usually include growth, balanced, ethical, conservative, cash, etc. But you usually can’t pick which shares to invest in.
An SMSF is different because it allows you to choose your own investments. An SMSF also offers a wider range of investment options that many industry and retail super funds don’t offer.
There are some differences in how SMSFs are regulated by the government and how they are administered. One key difference between SMSFs and larger funds is that SMSFs must have no more than six members. In addition, the fund is run by all the members collectively.
While it sounds good on paper, managing your own superannuation is a major decision that comes with a lot of risk and responsibility. For more information about the benefits and risks, continue reading below.
Benefits of an SMSF
Access to more investment options
One of the biggest benefits is the wide range of investment options. With a SMSF, you have more choice and freedom to access investment options that would otherwise be unavailable through a superfund. This includes assets like art, collectibles and property.
Flexibility
Managing your own investments means you can make quick changes based on the market. With the other trustees you can manage the rules of the SMSF to suit your circumstances.
Combining your super with others
Unlike a retail or industry super fund, SMSFs allow you to pool your superannuation with up to five other people, to make six members in total.
Tax benefits
If you’re in a SMSF, you’re entitled to the same reduced tax rates that are available through other super funds. Your investment return is therefore taxed at a maximum of 15% rather than the marginal tax rate - which could be as high as 45% for high income individuals.
Cons of an SMSF
Time
SMSFs can be very time consuming to manage. This means they won’t be suitable for those who aren’t prepared to spend lots of time researching investments and keeping tabs on the performance of those investments.
These tasks can be outsourced to your financial adviser and their research team, with you reviewing their recommendations – but you as the trustee are responsible for the investment decisions.
Cost
SMSF’s can be expensive to run and manage. You effectively have three tiers of costs:
Accountancy Fees to prepare and audit the SMSF Financial Statements, as management costs are fixed and can therefore erode low value SMSFs. You need to ensure your Trust Deed and other items keep up to date with the legislation – which changes regularly – and this requires a legal firm specialising in Trust Deeds to do this on your behalf.
Management Costs to track and record investments. This can be as low as nil if you do it yourself. I can never quite see why you might not use a “platform” to do this if you don't want to do it yourself – as they are generally capped in amount. If you have an administrator do this for you it (such as your advisor or accountant), they are likely to be much higher.
Advice Fees. If you use an advisor to assist you through the investment options and through the maze of legal changes – you will have this cost.
Costs to operate a SMSF can, however, reduce proportionately when the value of the fund’s assets are high. Again, this depends on your personal circumstance and therefore the cost and benefit should be calculated.
Expertise
You’ll be responsible for creating and implementing your own investment strategy—one that will need to deliver enough returns to adequately fund your retirement.
This means you need to:
Understand how investment markets work.
Record your investments and transactions.
Ensure your fund is adequately diversified to help manage risk.
In addition, you also need to have considered insurance for any members.
Legal Risk
One of the biggest negatives of running an SMSF is that you’re responsible for making sure your fund is compliant with all the rules and regulations and if it’s not, be willing to accept full responsibility.
The penalties for getting this wrong are pretty high.
An SMSF might be right for you if:
You’ve got a legal background or good legal knowledge
You are very financially literate
You’ve got a big super balance
You are willing to invest significant amounts of time researching investment options and managing your fund
You want complete control of your superannuation
You want to own property within your super fund
You want to borrow to buy property, or maximise wealth creation using borrowed funds
You want an intergenerational plan or method of carrying wealth through to the next generation
You have a large age gap between you and your partner
For more information about SMSFs please contact one of our Financial Advisers. We will be able to discuss your situation, and recommend some options to help you plan for your retirement.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate considering your particular objectives, financial situation and needs.
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