Super & SMSF
Is an SMSF suitable for you?
A self-managed super fund is no different from other funds in that it’s the biggest long term investment to save for a secure retirement. Although, a distinctive feature of a SMSF when compared to others funds is how the fund is controlled. With SMSF, the trustee is in total control of what is being invested and how the fund is run, however, with more control comes greater responsibility, time and expertise.
When assessing whether controlling a SMSF is appropriate for you, it makes sense to consult with your advisor to assist you in making this decision – or whether there are more desirable options available, in particular:
- Do you have the appropriate amount of capital to set up a SMSF?
- Do you have the time to allocate, understand and run the fund?
- How much do you need for your retirement?
- What are the best investment options to suit your retirement goals?
- What are the benefits of a SMSF (including tax advantages and estate planning benefits)?
- What are the requirements for setting up a SMSF?
- What are the trustee’s responsibilities for managing a SMSF?
- What fees and charges will you incur?
Why people set up SMSF
Many investors don’t want a third party to act as trustee for their own retirement. They want that control and have the final say on how it operates.
Some people like to include a range of direct investment in their superannuation fund. For instance, this may include real estate (residential or commercial) and direct shares.
There’s a lot of discussion whether a SMSF is cheaper or more expensive than other types of superannuation funds available, however, this depends on a range of factors such as: initial capital deposit, amount of further contributions and types of investment chosen. Given the fixed nature of some SMSF expenses (administration and audit fees), the average cost of running an SMSF expressed as a percentage of total assets starts to decrease as the SMSF balance increases.
Estate Planning & Benefit flexibility
Superannuation is rapidly becoming a major asset for most Australians. This is particularly the case where you have your own SMSF. In this instance, it is essential that your superannuation is dealt with properly as part of your estate planning strategy. For example, benefits can be paid out as a lump sum, a pension or a combination. Further, with regards to a deceased estate, proper arrangements should be made prior to a member’s death to ensure that the member’s wishes are carried out. Provided that such measures have been put in place a high level of certainty can be achieved. Ideally these should be considered before the fund has been established
Key Potential Disadvantages
SMSF will not be suitable for everyone, so before deciding to use an SMSF, an investor must consider any downsides. Potential risks may include legislative non-compliance. This could arise due to lack of Trustee experience or poor superannuation knowledge. While there are service providers which can assist with the ongoing management of SMSF’s, ultimately it’s the funds trustee members who are responsible for the operation and legislative compliance of the fund.
Potential inappropriate investment strategies
How many friends have said they want to set up a SMSF so they can go buy a holiday home for their own use? Or use their super to help fund the purchase of their own home? Or even pay off their home loan? However, superannuation was established for the provision of retirement benefits. This is clearly stipulated in section 62 of the Superannuation Industry (Supervision) Act, 1993. As such, any investment must be in accordance with the rules and legislation set forth within this Act.
Potential inappropriate investment advice
If you are the trustee of your SMSF, you are responsible for the fund’s assets/investment strategies. However, problematic strategies and ineffective investments can arise if you follow inappropriate advice from unqualified participants. Consequently, this can lead to significant loss of superannuation money and potential non- compliance.
Potential risks associated with legislative change
Superannuation industry has and always will be subject to regular legislative development. Although such evolution can increase the risk of legislative non-compliance in the event the SMSF trustee don’t keep track with relevant changes.
Personal Insurance risks
Having an appropriate investment strategy is an important element in making sure the SMSF is a complaint super fund, part of that investment strategy needs to include life insurance considerations, it needs to be documented and kept for compliance purposes. This can be as simple as recording the process taken in considering life insurance, and the reasons for that decision, as part of meeting minutes or as part of a strategy document.
Typically most employed sponsored super funds have a basic level of insurance, if you transfer all your employer fund into a SMSF you lose those insurance benefits that you may otherwise not be able to obtain due to medical conditions.
Where an investment has lost its value due to fraudulent activities, the investment manager of certain types of superannuation funds: retail, industry and employed sponsored funds may receive a level of protection under legislation. This however is not available to SMSF trustees – they must seek other avenues for redress.