If you’re thinking about setting up a self-managed super fund (SMSF), there are a lot of things you need to consider beforehand. This includes, but is not limited to, the costs of setting up and running an SMSF, being in charge and making the investment decisions yourself, complying with super and tax laws, and having the time and skills to run an SMSF.

Here’s a guide to help you decide if an SMSF is right for you:

What is a self-managed super fund?

A self-managed super fund (SMSF) is a superannuation fund that is controlled by the trustee/s (you and/or three other people), and is also registered with and regulated by the Australian Taxation Office (ATO). When setting up and managing your SMSF, you need to follow the rules set out by the ATO.

If you decide to set up an SMSF, it should be to save for your retirement and to provide death benefits for your dependents. If there are other trustees of the fund, you can also run the SMSF in order to provide death or retirement benefits for them and their dependents.

Having an SMSF means you have more control over your super, but it also means you’ll have more responsibilities and work to do when managing your super. You’re also personally liable for every decision you make in regards to the fund, even if you get a professional to help you, or another member makes the decision.

What are the costs of setting up and running an SMSF?

There are a lot of costs involved in setting up and running an SMSF, such as:

  • Initial funds – You’ll need a significant amount of funds to start off with and maintain yearly running costs. At least $200,000 is preferable so you can save more on costs
  • Average operating expenses – According to the ATO, the average operating expenses for SMSFs is cheaper now than it was before, e.g. $4840 in 2010 compared to $6389 in 2008
  • Running costs – The administration of an SMSF includes fixed costs, which are paid to establish a trust deed, prepare annual accounts, and an annual audit report. The cost of investing, accounting and auditing for an SMSF may be higher than what you’re paying for your current super fund
  • Additional costs – You may also have to pay for extra help with tasks like preparing the annual return, getting an annual valuation of your SMSF assets, obtaining an actuarial certificate for SMSF pension payments, seeking tax, legal and financial advice, getting help with fund administration, and taking out insurance for your members
  • Average expense ratio – The ATO also estimated that the average expense ratio for SMSFs with $200,000 or more in assets is below 1% p.a., which is lower than most retail and industry super funds. However, people who have small balances (e.g. less than $200,000) may find it hard to justify an SMSF
  • Fees – Fees are also going down, as more trustees use low-cost index funds for their equity exposure, new funds and administrative services offer competitive prices, account balances are bigger, and the expense ratio is brought down. Fees you have to pay for include the supervisory levy and legal fees (e.g. if you need to amend the trust deed).

Advantages of SMSFs

Before you set up an SMSF, you need to look at its advantages and disadvantages, which are discussed below.

  • Age pensions – You can change investments or fund managers without having to cancel your age pension. You also don’t need to trade-off performance to be eligible for an age pension
  • Tax concessions – This includes a) SMSF earnings are taxed at a concessional rate of 15%, b) If you hold any investments in your SMSF for more 12 months, capital gains are taxed at an effective rate of 10%, and c) Contribution tax payments in an SMSF are deferred until after you lodge your annual tax return
  • Greater control over your savings – Since you’re the trustee of your SMSF, you can make your own decisions in regards to what investments and strategies will work best for your retirement savings
  • Greater flexibility over your investments – You can a) Choose to hold direct assets (e.g. property, cash and listed shares), b) Decide what to invest in and how to allocate assets in your SMSF, and c) Directly acquire business real property, listed shares and managed funds from other members
  • Estate planning benefits – You can take advantage of estate planning strategies in order to transfer your wealth from one generation to the next with maximum asset protection and minimum tax liability
  • Pool resources with other members – If your SMSF has other trustees, you can combine all your assets together to increase your funds for retirement. If you have pooled assets of more than $200,000, this will allow you to access more cost-effective and efficient strategies for investment.

Disadvantages of SMSFs

  • Can deliver poor and costly outcomes – If you neglect your responsibilities, invest in poor products, or take on too much risk, expect poor outcomes from your SMSF – and at a considerable cost too
  • Members/trustees – An SMSF can only have up to four members or trustees, and they all need to be involved in the management of the SMSF
  • Responsibilities – All trustees should have an understanding of super and tax laws, and ensure that the SMSF complies with those laws. If the SMSF is found to be in breach of the law, trustees could be fined, and the fund might suffer tax consequences
  • Insurance – You may need to purchase separate insurance for yourself and the other members; such as life, disability and income protection insurance. Insurance premiums for SMSFs may be higher compared to other super funds. Also, keep in mind that age and health issues may limit your chances of buying a new policy and reducing your premiums
  • Regulation – As mentioned above, SMSFs are regulated by the ATO. To manage your SMSF, you and the other trustees must engage with the ATO
  • Complaints and disputes – When resolving disputes, SMSF members don’t have access to the Superannuation Complaints Tribunal. The ATO also doesn’t get involved with disputes among members. Members should find other means of resolving disputes or go to court at their own expense. SMSF trustees also aren’t eligible for statutory compensation
  • Fraud and theft – If an SMSF trustee loses their money as a result of fraud or theft, they won’t be able to receive government compensation. SMSF members might have legal options under the Corporations Law, but there’s no guarantee that they’ll be awarded compensation.

Can you manage an SMSF all by yourself?

Managing an SMSF all by yourself can be a tough job, especially if you don’t have the time, skills, and assets to do so properly. To ensure the success of your SMSF, and that you meet your obligations as an SMSF trustee, there are key people you’ll need to work with and pay for their services. For example:

  • Other fund members or trustees – As mentioned above, an SMSF can have up to four members or trustees who can share the responsibility of managing the fund
  • Independent SMSF auditor – They should be registered with the Australian Securities and Investments Commission (ASIC), and their job is to complete your fund’s annual audit report
  • Qualified actuary – They can give you an actuarial certificate if your SMSF makes pension payments to its members
  • Qualified independent valuer – A valuer can determine the current market value of your assets
  • Administrator – They can manage the majority of the day-to-day running of your SMSF, but remember that you’ll still be held responsible for any decisions made by your fund
  • Accountant – They can help prepare financial accounts and statements that meet accounting standards
  • Tax agent – A tax agent will lodge your SMSF annual return to the ATO
  • Financial planner – They can be useful for wealth or estate planning
  • Investment manager – They can help you choose and monitor investments for your fund
  • Super, tax, or legal specialist – You may want to speak with a specialist for complex situations.

Other things to consider before you set up an SMSF

Before you decide whether an SMSF is right for you, you also need to consider the following:

  • Trustee responsibilities – All trustees are responsible for the running of the SMSF and should also a) Know all their legal responsibilities, b) Ensure contribution caps aren’t breached, c) Pay the right amount of pension into pension accounts in the SMSF, d) Write and review the investment plan, and e) Track super investments on a regular basis
  • Understanding the risks and laws – If you don’t comply with super and tax laws, there’s a high cost to pay, and you also won’t be eligible for tax concessions. It’s illegal to set up an SMSF to access your super early or to purchase a holiday home or decorative artworks. You also shouldn’t use an inappropriate loan arrangement, breach the in-house assets test, and refuse to document all the fund’s assets
  • Time, skills, and assets – You need to have the necessary time, skills, and assets to set up and run an SMSF, as well as to comply with the law and make good investment decisions
  • Doing your research – If you want to run an SMSF, you have to complete theSMSF Trustee Education Program that can help you understand your role and responsibilities. The ATO also has other useful information onSMSFs. For SMSF advice, ask a member who belongs to theSMSF Professionals’ Association of Australia (SPAA)
  • Seeking professional advice – You may also want to seek advice from a qualified, licensed professional to help you decide if an SMSF is right for you. Tax agents and accountants can show you how to set up and run an SMSF, while licensed financial advisers can tell you which super fund will best suit your needs and what you should invest in.

A self-managed super fund can be right for you if you’ve done your research and understand your responsibilities, as well as know the costs, risks, and benefits involved. Before you set up a SMSF, you should also be 100% committed.

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