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What’s a self-managed super fund and should I have one?

12 February 2018

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Self-managed super funds (SMSFs) have become increasingly popular in recent years, but they come with many pros and cons and are certainly not for everyone.

They are often called ‘do-it-yourself’ or DIY super funds and, as their name suggests, they are super funds that are managed by their members.

SMSFs have many advantages

For one, they provide you with more flexibility and choice in the type of assets you can invest your super in. This is because they allow you to hold some assets that many other superannuation vehicles usually don’t allow you to hold, such as collectables, unlisted shares and property.

Some small business owners own their business premises through their SMSFs and then lease these back to their businesses. This provides a steady income with a reliable and known tenant for the SMSF and frees up any capital to help the small business grow. That said, it’s vital to remember that the sole purpose for having an SMSF must be to provide retirement benefits for all members of the fund.

Another advantage offered by SMSFs is transparency. They enable you to better understand where your money is invested. So if, for instance, ethical investing is important to you, you can ensure that your super assets do not include investments in, say, fossil fuels, tobacco or products tested on animals.

With an SMSF, you can also sell or buy assets quickly. With some large super funds, there may sometimes be an annoying lag between the time an investment change is requested and when its executed.

SMSFs can also be a great way to pool your super assets with family members. An SMSF can have up to four members, which provides an opportunity to consolidate several superannuation accounts into a bigger one. This immediately creates a larger fund, widening your potential investment opportunities and allowing you to buy assets you might otherwise not be able to afford. At the same time, you’d be paying only one set of fees.

SMSFs also come with many risks and disadvantages

SMSF trustees have strict duties, responsibilities and obligations.

SMSFs are regulated by the Australian Taxation Office and have similar rules and restrictions to other larger super funds. It’s crucial for SMSF trustees to understand all the compliance requirements and to keep up with legislative changes because the penalties for mismanagement of an SMSF or non-compliance are high.

There could, for example, potentially be a 45 per cent tax penalty on the fund and prosecution of the trustee/s. There are also penalties up to $12,600 per trustee for a breach of the rules.

Trustees are also required to prepare an investment strategy for the SMSF and to make investment decisions in line with that strategy. In addition to ensuring an approved SMSF auditor is appointed each tax year, trustees must complete administration tasks such as lodging annual returns and record-keeping.

SMSFs can also be costly to set-up. There are annual compliance costs, such as accounting fees (typically around $2,000) and supervisory levies. And, you may also have to pay for financial advice or fund managers fees.

But because many of these fees are fixed and not based on a percentage of your super balance, the more money you have in an SMSF and the more it grows, the more cost-effective running your SMSF becomes.

That said, if the costs are higher than what you are currently paying, they could quickly eat into your super savings and leave you with less to retire on.

No wonder some experts believe you should have a super balance of at least $200,000 before you start a SMSF.

It’s also crucial to consider whether you have the time, knowledge and experience to run your own SMSF. Can you do better than the highly skilled professional managers employed by most super funds to manage members money?

With all this in mind, perhaps it might be a good idea to speak to a professional adviser to determine whether an SMSF is right for you, or whether there are better options to help you grow your retirement nest egg.