Self-managed super funds (SMSFs) are often promoted as a way to take control of your super. Want to invest in property, choose your own shares and ETFs, or have more say in how your retirement savings are invested?
An SMSF might sound like the answer, but there’s more to it than choosing investments. You also take on the responsibility of running a super fund, including its costs, administration and compliance.
So, how do you know whether an SMSF is right for you?
What is a self-managed super fund?
An SMSF is a private super fund with up to six members who are generally also its trustees or directors of a corporate trustee. MoneySmart explains the responsibilities of SMSF trustees in more detail.
Unlike an industry or retail super fund, where much of the administration is handled for you, an SMSF gives you greater control over investments but also makes you responsible for ensuring the fund complies with superannuation law.
You can outsource work to an accountant, administrator or financial adviser, but the responsibility doesn’t disappear. You’re not just managing your investments. You’re running a super fund, and the buck stops with you.
When does an SMSF make sense?
There’s no single super balance that makes an SMSF right for everyone. It depends on your goals, investment strategy and circumstances.
For example, a business owner may want to hold their business premises in an SMSF, subject to the relevant rules. Someone who simply wants to invest in shares and ETFs may be able to achieve that through their existing super fund or a member-directed investment option.
An SMSF isn’t automatically better because it offers more investment choices. The question is whether those choices provide a genuine benefit.
What about property?
Property is a common reason people consider an SMSF, but there are strict rules. You generally can’t live in residential property owned by your SMSF, and neither can your related parties.
Property can also be expensive to buy and manage, and it may be difficult to sell quickly when the fund needs cash to meet expenses or pay retirement benefits.
Consider diversification, too. If you already own your home and an investment property, adding another property through super could leave much of your wealth concentrated in real estate.
Tip: Before buying property through an SMSF, understand the rules, costs and liquidity requirements, and consider how it fits into your overall wealth.
How much does an SMSF cost?
SMSFs come with ongoing costs, including accounting, tax returns, annual audits, administration and potentially financial advice and legal fees.
Costs vary depending on the fund’s structure and investments. A fund holding shares and ETFs may be simpler to manage than one holding property or using borrowing arrangements.
A larger super balance may make the costs more manageable relative to your assets, but it doesn’t automatically mean an SMSF is the best option.
Tip: Compare the total setup and ongoing costs with your existing super fund and other alternatives. Make sure the benefits justify the extra expense and responsibility.
Three SMSF traps to avoid
1. Underestimating the workload
You’ll need to maintain records, arrange an annual independent audit, lodge tax returns and ensure the fund complies with the rules. Professionals can help, but you’re still responsible for the fund.
Tip: Be realistic about the time involved and what you’ll need to manage or outsource.
2. Assuming more control means better returns
More investment choice doesn’t guarantee better performance. You still need a sound investment strategy, appropriate diversification and an understanding of the risks.
Tip: Make sure you have the time, knowledge and confidence to manage your chosen investments.
3. Neglecting estate planning
Think about what happens if you pass away, become unable to manage the fund or your family circumstances change. Decisions about who takes over as trustee and how benefits are paid can become complicated.
Tip: Review your estate planning arrangements and make sure they work with your SMSF’s structure and rules.
Three tips before setting up an SMSF
- Start with your goals, not the structure. Work out what you’re trying to achieve, then compare the available options. An SMSF may be suitable, but your existing fund might already meet your needs.
- Consider your future self. Running an SMSF takes time and effort. Think about whether you’ll still want that responsibility as you approach retirement.
- Get the right support. An accountant, financial adviser and lawyer can help you understand the rules and implications. Look for professionals who can explain both SMSF and non-SMSF options, rather than pushing you towards one solution.
So, should you set up an SMSF?
An SMSF can work well for people with specific investment goals and a willingness to take on the responsibilities involved. But it’s not the best option for everyone.
Before making a decision, ask yourself:
What can an SMSF do that all the other options can’t?
If you can’t clearly answer that question, explore your alternatives before committing to the extra cost and complexity.
Want to learn more about SMSFs?
Listen to Gemma Mitchell and Rask adviser Chamil Peiris discuss SMSF costs, investment options and common traps on The Australian Finance Podcast.
Need help finding the right super strategy? Explore Rask Advice to discuss your goals and options.
This article is general information only and is not personal financial advice. Consider seeking professional advice about your circumstances before making an SMSF decision.
