Self-managed superannuation funds (SMSF) have become increasingly popular as a growing number of Australians take ownership of their retirement wealth. Today, there are more than 1.1 million SMSF members around the country.
SMSFs are the means with which you can direct super into your own fund, which you can then manage and invest as you see fit to grow your retirement savings. SMSF accounts typically appeal to those with higher super balances, as well as those who believe they can draw higher levels of returns by making their own investment decisions.
While it’s certainly true that SMSFs have great potential, they are not always suitable, and both the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC) have strict requirements for members running an SMSF.
Considerations before setting up an SMSF account
The first thing you should consider when looking at SMSFs is whether the costs are justified. Generally speaking, it is quite expensive to operate an SMSF, with annual costs spanning thousands of dollars, and that’s before you take into consideration insurance premiums, which typically run higher for SMSFs, plus investment fees and the like.
Given the expenses involved, SMSFs are most suitable for those who have a significant amount of money in their super. ASIC recommends that you should have at least $500,000 in your fund, otherwise, a self-managed super fund is likely to be uncompetitive when compared with APRA-regulated funds. While this is in part due to the fees involved, there is also an added level of complexity in running an SMSF.
To run an SMSF, you will need to comply with extensive regulations, reporting requirements, and responsibilities as a trustee of the fund. Due to the fund structure, you will be responsible for the SMSF.
This includes making sure the SMSF is independently audited each year for compliance and finances. At the same time, this also means that any breaches of the rules could see you reported to the ATO, who have the power to launch civil or criminal actions, as well as find the fund as ‘non-complying’, invoking penalty tax rates rather than the generous concessional super tax rate of 15%.
Not only are these requirements burdensome in terms of the time you must set aside to manage your superannuation, but it also requires a high level of knowledge, understanding, and investing experience. What’s more, you also need to be mindful of any changes in relationships between members of an SMSF, as this can lead to several difficulties.
Pros of SMSFs
Self-managed superannuation funds offer several potential benefits, including:
- Control and flexibility over what you invest in, and when you buy or sell investments, provided it aligns with your fund’s investment strategy and rules
- A cost-effective solution for high-balance super funds
- The ability to invest in alternative asset classes, if said assets generate retirement income for the fund’s members and dependents
- You may be able to raise debt to invest in a property
- Flexibility with death benefits, including binding and non-lapsing death benefit nominations
Cons of SMSFs
On the other hand, SMSFs do come with some drawbacks, such as:
- Time associated with ongoing management and reporting obligations
- The prospect of higher costs, at least compared with some industry funds
- SMSFs are unlikely to be suitable for those without a significant amount of money in their superannuation
- If you need to seek advice from an accountant, advisor, or lawyer, you will also face additional costs
- SMSFs provide no assurance of superior returns, and on average, DIY funds tend to underperform standard superannuation funds
- Few government protections should something go wrong, particularly with respect to special compensation schemes
For many, standard super funds provide a convenient option to accumulate wealth for your retirement. However, self-managed superannuation funds also have their place, providing distinct benefits as far as control and flexibility, broader investment choice, death benefit nominations, plus potential tax efficiencies.
Of course, to fully harness these benefits you must be in the position where it makes sense to set up an SMSF. Not only does that mean you require a large amount of super in your account, but you need to have a willingness to invest time and knowledge into building your retirement savings, while also taking on legal responsibility for compliance with SMSF rules.
If you are considering the possibility of an SMSF it’s important to get advice from professionals first. Fortunately, the team at Mintwell are experts in that department and can help you navigate the pros and cons to see whether an SMSF is right for you and your circumstances. Please get in touch with us to chat further!