Having control over how your retirement savings are invested is one of the many benefits of self-managed super funds (SMSF).
On the flip side, the responsibilities and management skills required to run an SMSF are significant. This is because you’re accountable for your SMSF’s regulatory compliance—not your accountant, financial adviser or solicitor.
In this article, we’ll explore what might make an SMSF more attractive than investing through a super fund, and some of the downsides to consider.
Benefits of SMSFs
Access to more investment options
Having an SMSF provides more choice and freedom to access investment options that would otherwise be unavailable through a super fund. This includes assets like art and collectibles—such as stamps and coins—as well as physical gold.
Unlike investing with an industry, bank or retail super fund, your SMSF can borrow to invest in property, typically using a structure called a Limited Recourse Borrowing Arrangement (LRBAs).
This strategy is a good option to help expand your investment portfolio. However, there are restrictions and compliance requirements. The Australian Taxation Office (ATO) has recently warned investors of the dangers of over-investing (and over borrowing) into property within SMSFs.
If you’re an SMSF trustee, you’re entitled to the same reduced tax rates that are available through super. 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 super funds.
More scale to access opportunities
Generally speaking, an SMSF fund can have up to four members. Bringing four investors’ money together, offers greater scale to access investment opportunities that may not be available to you as an individual investor. Having scale may also help to keep fees down.
Considerations to be aware of
Managing an SMSF is not easy. As the trustee, you need to ensure the fund complies with all relevant regulations otherwise you could face severe consequences for getting it wrong.
If the fund is deemed to have breached its compliance responsibilities, penalties can include fines and civil or criminal proceedings. Depending on the transgression, tax penalties could be levied, including fund returns being taxed the top personal marginal tax rate as opposed to the concessional super rate of 15%.
What investors often overlook is the financial and investment expertise required to run, or be involved in running, an SMSF.
As a trustee, 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, including sharemarkets
- record your investments and transactions
- ensure your fund is adequately diversified to help manage risk.
You’ll also need to remain up to date on any changes to legislation that affect SMSFs as these may have compliance requirements.
An understanding of how to manage legal documents, such as a trust deed, is also beneficial. However, a legal professional could help you with this.
The administration and management of an SMSF is time intensive so if time is something you’re short of, an SMSF may not be a good option. On the other hand, many SMSF investors enjoy the sense of involvement and purpose that running their own fund brings.
Outsourcing to professionals
If you find you don’t have the time or investment knowledge to manage your SMSF, you can outsource this to investment managers, financial advisers or other experts. This will come at an additional cost though.
Minimum amount required
There is a lot of controversy around what should be a reasonable amount to set up an SMSF.
Depending on the fund’s complexity and structure, set up costs, administration, reporting and legal fees can become expensive so a general rule of thumb is to have around $500,000 as a minimum.
Bottom line: While SMSFs are not for everyone, they do offer significant benefits. Running an SMSF successfully requires investment, legal, super and admin skills—or the ability to get help from people who have those skills. A conversation with a financial adviser or accountant could help you decide whether going it on your own is a good option.
If you would like to receive competent advice on how to manage your SMSF, please email us on firstname.lastname@example.org with your contacts, for an exploratory meeting, at our cost, not yours.