Self-managed super fund (SMSF) can be great for those who have the time and know-how to manage one. A SMSF can offer flexibility and control that retail and industry super funds don’t. Taking up a SMSF can sound like a no-brainer, who doesn’t want total control over how their hard-earned retirement savings are invested?

But, a SMSF is a big investment decision, that shouldn’t be taken lightly. It takes a large amount of legal knowledge, as well as time and money to set up. Also, you need a decent super balance and very good understanding of the risks involved in managing your own super.

There are over 1 million Australians who belong to the 590,000 SMSFs that are in existence today. There are over 20,000 SMSFs established each year. However, the question you should ask if you are thinking about an SMSF is — is SMSF the right for you?

If you are considering taking the DIY approach to managing your super, we recommended that you take the time to research, what it takes to manage a SMSF thoroughly. We’ve put together a guide to help you better understand SMSF, plus the pros and cons.

What is a SMSF?

As the name implies, a self-managed super fund is managed by you. Unlike your typical retail or industry superannuation fund, where you effectively outsource how your retirement nest egg to a superannuation provider, you’re in charge of where that money is invested.

A SMSF allows you to choose your own investments, as well as offering a wider range of investment options that many industry and retail super funds don’t offer. You can also have up to four members, who are friends or family, all of whom are trustees. As a result, are equally responsible for decisions about the fund and the compliance of the fund with super and tax laws.

Who has an SMSF?

According to the ATO, the gender difference between SMSF fund members is pretty even, with 47.3% of members women and the remaining 52.7% men.

Not everyone who has an SMSF is necessarily on a six-figure income. While it’s true that in the financial year 2017/18 the average taxable income of all SMSF members was $117,000, the median taxable income was $64,000.

The Pros

More investment control

You can establish your own investment strategy and directly control where and how your super is invested.

Larger investment choice

The biggest benefits are you can select from a wider range of investments including: all listed shares, some unlisted shares, residential and business property, and collectables such as artwork, stamps and coins.

One fund for the family

You can set up a fund for yourself and up to three other people and consolidate your super balances. This could enable you to invest in assets of higher value than if you set up a fund with fewer members. Which enables you to achieve greater estate planning flexibility and reduce fund costs.

Borrow to make larger investments

Your SMSF could make a larger investment in assets such as shares and property by using cash in your fund and borrow the rest.

Tax savings

With SMSFs you can take greater control over the timing of tax events such as starting a pension without triggering capital gains tax when your superannuation assets move into pension phase. You may also have the option of transferring certain assets that you own into your SMSF.

Greater estate planning certainty and flexibility

You can nominate who you would like to receive your super when you pass away without having to meet some of the constraints that apply to other super funds.

Pooling your super with others

Unlike a retail or industry super fund, SMSFs allow you to pool your superannuation with up to three other people.

The Cons

Higher costs for lower balances

SMSFs generally only become cost-effective if the fund has $200,000 or more invested. This is particularly true where you outsource and pay for most or all the fund administration.

The costs involved in establishing an SMSF need to be carefully compared with the cost of alternatives. Costs incurred in the establishment of an SMSF may include:

  • Professional advice costs (such as financial, investment, tax and accounting advice) obtained in relation to the use and establishment of an SMSF
  • Legal costs associated with the preparation and execution of the fund’s trust deed and other legal documentation, including all associated consultations
  • Cost of setting up a corporate trustee, if required
  • Registering the fund as a complying superannuation fund with the ATO and obtaining the ABN and TFN
  • Cost of training or education to get you up to speed with running an SMSF

Greater responsibility

When you set up an SMSF, you and any other fund members will generally need to be trustees (or directors of the corporate trustee) and will be responsible for meeting a range of legal and other obligations.

Penalties for non-compliance

The ATO, as regulator of self-managed super, has the power to remove a fund’s complying status, unleashing a tax shocker. This is one of the ultimate sanctions against wayward funds.

The market value of a non-complying fund, less non-concessional (after-tax) contributions, is taxed at the highest marginal rate. This could destroy much of the retirement savings of every member of a SMSF. And trustees can face civil and criminal sanctions for serious breaches.

Unable to live overseas

If you have a SMSF and decide to move overseas, you may find yourself in trouble with the Tax office. The majority of SMSF members must permanently reside in Australia. If you intend to move overseas permanently or make contributions to your fund while living overseas this could make your fund non-compliant with the law.

Time consuming

You will need to have enough time, knowledge and skills to manage your own super and meet your legal and other obligations.

An SMSF might be right for you if:

  • You’ve got a legal background or good legal knowledge
  • You’re 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 understand the costs associated with running an SMSF and can cover these costs
  • You want complete control of your superannuation
We recommend before you take the leap and set up your own SMSF, visit the ATO website before making any big decisions. Also, its worth checking out the setting up your SMSF ATO video.

An SMSF may not be right for you if:

  • You have a very low superannuation balance
  • You’re not financially literate
  • You’re not willing to put in the time or money to run an SMSF
  • You’re not prepared to take on the legal risks of running an SMSF
A SMSF might sound great to some who have the time and financial knowledge, but not everyone has the skill level or knowledge, it takes to manage a SMSF. If you are considering an SMSF, please consider speaking to financial adviser for independent advice before making any decisions.

At Oracle, we specialise in providing a full service setting up your Self-managed super fund, completing financials, tax returns and annual auditing. We use a dedicated software package designed comprehensively for Self-managed super funds.

Contact us or book a free consultation and see how we can help you set up your own SMSF.

Important information Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.
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