Australians who want greater control of how their retirement savings are invested are increasingly exploring the option of setting up their own self-managed super fund (SMSF). The freedom of putting yourself in the driver’s seat for your super has made SMSFs the fastest growing sector of the super industry. The number of SMSFs has surged over the last 15 years to around 580,000, managing over $600 billion in assets.
However, with this freedom comes added responsibilities – and costs. For those with the time, knowledge – and resources – SMSFs can be worthwhile, but for many they can become a minefield of regulatory compliance, accounting fees and difficult investment decisions.
We take a look at SMSFs, and what you should consider when deciding if they are right for you.
SMSFs vs retail super funds
SMSFs are personal super funds that let you, the trustee, make the investment decisions. The complication is that they need to meet certain conditions that differentiates them from retail or industry super funds.
Retail/industry super funds
Members can establish their own fund
Membership is in an established fund
Australian Taxation Office
Australian Prudential Regulation Authority
Number of members
Four or less members in each fund
Unlimited number of members
Who are the trustees?
Professional licensed trustee
Management of the fund
High level of control for members of the fund
Control is generally with the fund provider
Selected by the members of the fund.
Set by the fund provider, however some flexibility for Choice members
Advantages of an SMSF
Control over investments
SMSFs provide flexibility with your investment options, giving you the ability to invest in different types of assets, including direct property or collectables. Pooling funds with the other members means you may be able to afford an investment that would be out of reach on your own. As a member you are also a trustee, so you can decide when to change investments. Just like any super fund, you will need to establish a trust deed and ensure your investments meet the objectives of the fund.
The larger the SMSF, the greater the savings
Generally the cost of running an SMSF comprises fixed costs and costs that vary with the fund size. This often means that the larger the balance, the more cost effective an SMSF becomes. As a guide, a minimum balance of between $250,000 and $500,000 (depending on the level of involvement of the trustees) is needed for real cost savings.
Greater strategic opportunities
SMSFs give the trustee control over the strategies of the fund and how it operates, including borrowing to invest.
SMSFs and retail funds are both taxed in the same way. SMSFs can, however, often achieve better tax outcomes due to investment choice, flexibility and control over the timing of tax events.
Disadvantages of an SMSF
As a trustee, you hold all the responsibility and make all the decisions. Being a member of an SMSF means you must be a trustee, or a director of a company that acts as trustee. All trustees are responsible for the running of the fund and must act in the best interests of members when making decisions. Even though you can engage the services of professionals (such as financial advisers and accountants), as trustee you are ultimately accountable for the fund.
Risk of non-compliance
The responsibility for complying with superannuation law rests solely with you as trustee and the penalties for breaches can be harsh. If a fund is found to be non-complying, it will be taxed at the top marginal tax rate. In addition, administrative penalties for breaching regulatory provisions range between $900 up to $10,800 per trustee, depending on the offence.
Do you have the expertise?
The establishment of SMSFs usually spikes in flat or declining markets as investors believe they can make better investment decisions than super fund managers. It’s necessary however to set out the investment strategy for the fund and must take into account the personal circumstances of all fund members including their age, investment risk tolerance and attitude to risk. That’s why it’s a good idea to have investment expertise when running an SMSF.
Do you have the time?
It’s possible to outsource different areas of SMSF management, but because you are ultimately responsible you will need to devote time to manage your SMSF.
Limited ability to diversify investments
You may not have sufficient money to diversify across a range of assets.
Weighing up your options
Most super funds offer a wide range of investment options that allow you to take control of your super without the complexity of being a trustee and running the fund. However for many being the master of your own retirement savings can be priceless.
Choosing what’s right for you is a significant financial decision. Remember, it’s always better knowing more, so if you want to know if an SMSF is right for you, talk to us today.
 ASFA - Superannuation Statistics September 2016