In this article, we look at the pros and cons of self-managed super funds.
While there are many types of super funds and accounts that Australians can open, many choose to create self-managed super funds (SMSF), which allow for considerable control over retirement savings. It’s estimated that upwards of 1.1 million Australians have opened SMSFs.
Before you set up an SMSF, you should consider the pros and cons of doing so. While an SMSF offers more control over your retirement savings, maintaining one of these accounts requires some legal and financial knowledge, as well as more hands-on involvement. Here’s an in-depth guide on the primary pros and cons of self-managed super funds.
At Aspiri, we’ll guide you in deciding if a self-managed super fund is the right choice for you and help ensure that it is executed according to your needs.
We can help you set up and manage your SMSF, so you can enjoy all the benefits without worrying about the day-to-day management of your own funds. If you already have a self-managed super fund, we can look at strategies to increase your investments, minimise tax and provide you with strategies to help manage your SMSF.
Contact us to find out more about self-managed super.
What Is a Self-Managed Super Fund?
A self-managed super fund is a type of superannuation fund that allows you to manage the investments of the account yourself. It’s possible to have as many as six members in an SMSF. The main difference between SMSF accounts and other fund types is that SMSF members are considered trustees or directors, which makes it possible for these members to manage the fund.
All members of the super fund must comply with tax laws and will need to manage the fund for the purpose of delivering retirement benefits to each member. The fund holder will be tasked with making the fund’s investment decisions, which means that you have full control over what happens with your retirement savings.
Keep in mind that the Australian Tax Office regulates these funds in the same manner as super funds. The complexity of a self-managed super fund means that skill and time must be spent managing the fund if you want it to be successful.
How to Set Up an SMSF
According to the ATO, these are the steps that you need to take in order to set up an SMSF:
On top of this, we also recommend that you:
- Maintain extensive records
- Make sure that your financial skills and knowledge are strong enough to make the necessary financial decisions
- Adhere to an investment path that has acceptable risk tolerances
- If you act as the trustee, be ready to make decisions that could have legal implications
- Consider obtaining personal insurance, you may need to keep existing insurance if you are unable to obtain insurance within your SMSF.
- Perform considerable research on investment opportunities
Advantages of SMSFs
The main benefits of SMSF accounts include everything from complete financial control to ample tax benefits.
Diverse Investment Options
SMSFs provide the opportunity to invest in property, shares, and other assets that would be too expensive if you were investing on your own or that might not be available through traditional retail or industry super funds.
Complete Financial Control
Likely the top reason to create a self-managed super fund is that you have complete control over how your assets are invested. Since this is a self-managed fund, you’ll make all financial decisions alongside any additional trustees who have been appointed to the fund. With this control, you can choose how your retirement savings are invested.
Lower Operating Fees
When you run an SMSF, you may benefit from less operating costs. The larger the balance the more cost-effective an SMSF will be. In fact, most operating expenses incurred from operating your fund are tax deductible.
Faster Decision-Making
It’s possible to make quick decisions with an SMSF, which can play a substantial role in your returns. Making fast choices to invest in trends or withdraw your funds from unprofitable trends is necessary if you want this fund to be a success.
Ample Tax Benefits
When you create an SMSF, you can take advantage of several tax breaks involving superannuation. The superannuation tax rate is around 15% in accumulation and 0% in the pension phase.
Disadvantages of SMSF
If you’re wondering “What are the disadvantages of a self-managed super fund?”, there are a few issues with this type of retirement savings account that you should be aware of, the primary of which include financial risks as well as not having access to dispute resolution bodies.
Potential for Legal and Financial Risks
If you don’t have any kind of background in taxes or finance, managing one of these funds can be challenging. In the event that you make poor decisions with the fund, you could encounter legal and financial consequences, the primary of which revolve around taxation. As a trustee or director you are totally responsible for managing the SMSF, even if you outsource other functions to other professionals.
Non-Complying & Administration Penalties
You as a trustee or director need to be eligible to run an SMSF and not be a “disqualified person”. If you are ineligible to run an SMSF you need to either windup your SMSF or appoint an enduring power of attorney. If you are found to be non-complying when running your SMSF could be taxed at the highest marginal tax rate.
If you are found to breach certain administration rules, the ATO might impose an administrative penalty levied on the trustees. If you have 4 individual trustees then you are fined 4 times the fee.
Time-consuming Option
Deciding which avenues for investment your fund will take will require a considerable amount of research. You’ll also be tasked with monitoring the performance of any existing investments, which may not give you enough time to research new opportunities. The amount of time you need to invest in these decisions is directly related to the value of the investment.
For instance, using the fund to purchase a piece of real estate requires a significant amount of upfront research to make sure the investment is a sound one. However, managing the investment won’t be as difficult if you hire a property management company to perform this task for you.
Despite the size of this investment, you should have time to research new investments because of the low management requirements. In comparison, managing stocks or managed investments investment requires analysis in due diligence of the investment you are investing in.
You may also need to stay up to date with changes to superannuation legislation to ensure you don’t breach the superannuation rules. Breaching the rules could incur penalties levied on the super fund or the trustees.
Less Access to Dispute Resolution Bodies
An SMSF has less access to Australian dispute resolution bodies, which indicates that your fund could be harmed in the event that trustees are unable to obtain reputable legal assistance. Resolving disputes in traditional courts comes with high costs for SMSF funds.
Even though SMSFs aren’t ideal for every investor, they provide numerous benefits, the primary of which is that you have full control over investment decisions. Keep in mind that managing an SMSF requires legal and admin skills or the ability to hire professionals who provide these services.
Choose Aspiri to Get the Most out of Your SMSF
Here at Aspiri, we can help you assess whether a self-managed super fund is the right option for you and your circumstances.
Let us take care of the mundane details and legalities of your SMSF, so you can reap all the benefits without any added stress. If you already have a self-managed super fund set up, we can explore ways to grow your investments while reducing taxes and provide you with advice on how best to manage your funds going forward.
Unsure about how to invest for the future? Learn more about creating a successful long-term investment strategy within an SMSF, which provides many tax benefits. Contact us today.
Aspiri Financial Services Pty Ltd (ABN: 37 626 759 340) (“Aspiri”) holds an Australian Financial Services Licence issued by the Australian Securities and Investments Commission (AFSL No: 300878).
This material is issued by Aspiri and is general in nature, and does not constitute advice. This information does not take into account your personal objectives, circumstances, financial situation or needs. We strongly recommend you seek independent professional advice, including but not limited to speaking to a licensed financial planner and/or tax advisor, before opening an account with us and/or acquiring our services/products.
Aspiri does not give any warranty as to the accuracy, reliability or completeness of information, which is contained herein, except insofar as liability cannot be excluded. Past performance is not a reliable indicator of future performance.
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