If you’re financially savvy, the idea of having your own self-managed super fund (SMSF) can be appealing. You’ll have full control over your own retirement fund and be able to make all the investment decisions yourself to grow your fund.
They have become an increasingly popular option, with over 600,000 SMSFs in operation, and with over $600 billion funds under management.
However, there are risks involved, and managing your own fund can create a lot of work with associated legal and financial costs attached.
Read on for loads of useful information about SMSFs including what they are, how they work, and some of the pros and cons.
What is an SMSF?
Managing your own super means you put the money you would normally put in a retail or industry super fund into your own SMSF. You then have full control over how you invest and manage the money.
Your SMSF can have up to six members, who are friends, family, or business associates. It is set up via a legal trust deed and all members will usually be trustees of the fund, which means you’ll be jointly responsible for managing the fund. As an alternative, it is possible to appoint corporate professional trustees to manage your fund on your behalf.
Advantages of an SMSF
There are several benefits of running your own super fund. These include:
- An SMSF provides a far wider range of investment options that a standard super fund
- Unlike standard funds, an SMSF can invest in property. Crucially, it allows the directors of a small company to put their business premises into their pension fund. The property is then owned by their SMSF, and the rental payments are also invested in the fund
- SMSF funds are subject to the same tax concessions as standard super funds
- An SMSF gives you full control over the investments in your fund. This means you can react quickly to sudden market fluctuations and take up any short-term investment opportunities
- SMSF administration and management charges, which are normally fixed rather than applied as a percentage, become increasingly cost-effective as the fund increases in size
- The pooled investments of two or more members can provide a decent sized asset base from which to invest
- In the event of an individual or company holding an SMSF going bankrupt, the assets will usually be protected from creditors.
Disadvantages of an SMSF
As well as the advantages, it’s important to bear in mind SMSFs aren’t suitable for everyone. The disadvantages include:
- You, and fellow trustees, will become fully liable for the scheme. This means that if the fund is responsible for any breaches of investment or taxation legislation, you will be held responsible
- As an SMSF trustee, although you can call on third-party advice, you’ll ultimately be directly responsible for the investment performance relating to your retirement fund
- The costs of setting up a new SMSF can be substantial, especially as the overall value of the fund is likely to be lower at the outset. Fixed costs are likely to have a disproportionate impact in the early years
- The management and running of an SMSF can be time-consuming and stressful
- You and your fellow trustees will need a good knowledge of investment markets. Poor investment decisions could impact on the value of the fund
- The SMSF remains the responsibility of you and your fellow members. You remain personally liable for the fund, even in the event of you losing your job, your company folding, or if there is a breakdown in the relationship between the members.
Managing your SMSF
As we’ve already stated, running your own SMSF can be very time-consuming – even if you call on financial professionals for support.
Estimates suggest trustees can spend up to 100 hours a year managing an SMSF.
As well as time taken setting up the fund, there will be ongoing activities such as establishing and maintaining an investment strategy, including detailed fund research.
The fund will also require an annual audit, so you need to keep accurate records and update them regularly.
The cost of running an SMSF
The set-up and running costs for an SMSF can be high. In addition to the cost of setting up the fund, which will require the drawing up of formal trust documentation, there will be ongoing costs for accounting, legal and tax support.
You’ll also need to consider the level of investment support you’ll want when managing your SMSF. This may involve additional costs if you outsource this to a specialist company.
As well as specialist investment advice, you’ll also want to consider the support you’ll need around the wider running of the fund, especially as you approach retirement.
It’s difficult to quantify the exact cost of running an SMSF. No two funds will be the same, and each individual will require their own level of support and professional advice. Estimates range from $4,000 a year to more than $14,000.
The importance of advice
As everyone’s situation is different, and mistakes can prove costly, we strongly recommend you receive financial advice if you decide to set up your own SMSF.
Managing all aspects of an SMSF is a complex business, involving, among other things, dealing with large amounts of documentation and paperwork, preparing accounts, carrying out transfers and transactions, making investment decisions, and submitting the fund’s tax returns to the ATO.
At BDH, we have a wealth of experience in helping our clients set up and manage their own funds. Please get in touch if you’d like to know more about the services we can offer.
