Is a self-managed super fund right for me?

Dec 12, 2021

According to the ATO, over one million Australians have a self-managed super fund. But is an SMSF right for you?

Following our recent report on poor performing superannuation funds, it may have prompted you to consider what other options are out there. You might have discovered the world of self-managed super funds (SMSF). We explore this topic and cover what an SMSF is, and what the pros and cons are of choosing this type of fund for your retirement savings.

What is a self-managed super fund?

As the name suggests, a self-managed super fund is a private super fund that is managed by you. This is unlike a typical retail or industry superannuation fund where your superannuation provider is given the control over where your money is invested.

In a regular super fund you’ll often find a range of investment options to choose from, based on your risk profile. Ranging from a conservative, mostly fixed interest or cash based approach, to longer term high risk equity strategy. But what if you wanted to hold direct residential property, the commercial property that you operate your business out of or the crypto currencies you’ve been reading about.

Based on this, an SMSF can become appealing, as it allows you to choose your own investments. Plus, it can give you access to investment options the more traditional super fund providers don’t offer – such as collectibles, commodities, an individual residential property or some unlisted entities.

An SMSF can have up to four members who are trustees of the fund. Meaning they are equally responsible for decisions that are made about the fund, and all are responsible for the compliance of the fund too. On the other hand, it can allow you to pool your retirement savings to provide more investment scale.

The commitment and compliance side of running your own SMSF should not be underestimated. Because there are a range of responsibilities required, you must be committed to understand what’s involved and seek advice to decide if an SMSF is right for you.

How does an SMSF work?

Trustees manage SMSF funds by making investment decisions. They do this by following the legal requirement for SMSFs to have a documented investment strategy. This investment strategy needs to satisfy what is called the sole purpose test and the strategy should be used to guide trustee decision-making.

Some of the factors to consider when creating an SMSF investment strategy include:

  • The different make-up of the fund members, in terms of age, risk profile and financial situation
  • Recognising the benefits of diversification of investment options to reduce risk.
  • How easy it would be to convert assets to cash to pay future members benefits when needed
  • The insurance needs of members.

The decision whether to open an SMSF usually comes down to weighing up the pros and cons. The question it often comes down to is “does the control, flexibility and choice of investments outweigh the additional time, cost and risks?” Let’s explore this in more detail.

SMSF investor

Pros of an SMSF

There are a number of advantages that members enjoy with an SMSF.

Flexibility and control
This is a major reason people opt for an SMSF. Since members of the fund are also the trustees there is the flexibility to tailor the rules of the SMSF to suit specific needs and circumstances. As well as being able to invest in many of the products available to public funds, SMSFs can also invest directly in residential real estate, unlisted assets and collectibles.

Additionally, business owners can decide to use their SMSF to purchase their business premises or other commercial property.

Buy direct residential property
Buying an investment property through your SMSF can earn income from the rental payments while also enjoying the capital gain of the property value. You control the property you choose to buy and who you rent it to. This isn’t possible with a standard super fund.

Invest in rarer asset classes
You can invest in things that you generally can’t invest in with a regular super fund. For example, you can invest in art, antiques or collectables like coins and stamps. You can also buy physical gold.

Act quickly on investment decisions
With an SMSF you have the freedom to act quickly and jump on investment opportunities. You can instantly adjust your asset allocation if market conditions change. Whereas the bigger super funds tend to be much slower to act.

Greater flexibility with tax management
Tax benefits apply to all superannuation funds. Generally investors in Australia are entitled to have their member’s contributions and fund earnings taxed at the concessional rate of 15% (up to certain limits). Plus benefits after the age of 60 and when in pension mode are tax free.

Where SMSF have their edge is they have more flexibility to utilise specific tax strategies around capital gains, taxable income or franking credits.

Pooling your super
SMSFs allow you to pool your super with up to three other people. This can create an opportunity to invest in things one person may not be able to on their own.

Cons of an SMSF

The decision to open an SMSF is not one that should be taken lightly. There are a few risks and considerations you need to look at before deciding if an SMSF is right for you.

Time and cost
An SMSF can be time-consuming and costly. How much so, will depend on the investments you choose and the amount of professional help you need to operate effectively. You need to be aware that it is quite a regulated area in terms of compliance obligations. Seeking out an SMSF specialist to help can be beneficial because you’ll have annual financial statements, tax returns and an independent audit to coordinate.

If trustees don’t have a good level of investment knowledge, it’s best to seek professional financial advice. Which will incur a cost.

Generally speaking, you should have at least $300,000 of assets in your fund to make the costs of running a SMSF worthwhile.

Can be risky
All investments come with some level of risk. Non-traditional investments favoured by SMSFS tend to be associated with higher risks. The more investment experience you have, the better you’ll be at managing this risk, but you still need to be confident in your ability to create and manage your SMSF investment strategy. If you’re not, you could be better off with a regular super fund that manages these investments for you.

SMSF regulation changes
Understanding all the regulations and policies concerning SMSFs now, doesn’t mean the
laws will stay the same going forward. As we have seen, changes are not uncommon. So staying up to date with regulation is vital to avoid being fined for not complying with regulations.

Risk of heavy fines
SMSFs must follow the super laws as set by the ATO. If a fund breaches these laws, hefty fines can apply.

Want to set up an SMSF?

As an SMSF trustee, you’re responsible for making investment decisions and ensuring implementation of the investment strategy. With strict administrative obligations that require you to maintain records, provide financial statements, complete a tax return and organise an independent audit, it’s recommended you consider engaging an SMSF specialist to help trustees manage the accounting, auditing and tax reporting.

If you’re sure about managing your own super fund, start researching investment options, and consider getting professional advice from the Tribel Advisory team. Because everyone’s situation is different, it’s always best to get financial advice before you make a decision or any investments.

All of the material published on this web site is for information purposes only and does not constitute advice. 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, we recommend you consider, with or without the assistance of a Financial Adviser, whether the information is appropriate in light of your particular needs and circumstances

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