What is a self managed super fund and how does it work? 

Self-managed super funds (SMSFs) are an increasingly popular way to manage retirement savings. They offer many benefits, including more control over investment decisions and tax savings.

But SMSFs are not suitable for everyone.

In order to decide whether an SMSF is right for you, it is essential to consider a range of factors. There are a number of key considerations you need to make when deciding whether or not to establish an SMSF.

What is a self-managed super fund?

A self-managed super fund (SMSF) is a type of superannuation that allows you to manage your own investments. SMSFs are governed by strict rules set by the Australian Taxation Office (ATO) and must comply with the Superannuation Industry (Supervision) Act 1993.

SMSFs can be established by anyone who is eligible to receive superannuation benefits, including employees, the self-employed and retirees. An SMSF can have a maximum of six members in the fund and all members must be trustees or directors of the fund, depending on the fund’s structure.

A trustee is someone responsible for managing the investments and legal compliance requirements of an SMSF. A trustee may be a corporate trustee where a company is appointed as a trustee of a fund, in which case all directors of the company must be members of the fund.

One of the main benefits an SMSF has is that it gives you greater control over your retirement income. You can choose which assets to invest in, and how to allocate your assets between growth and income-producing investments, provided they are compliant with superannuation law and the investment strategy of the SMSF.

Another advantage of an SMSF is that it can provide flexibility in the way you take your retirement benefits. For example, you can choose to take a lump-sum payment or an income stream from your SMSF when you retire.

The main disadvantage of an SMSF is that it requires a lot of time and effort to manage effectively. You will need to keep up with changes in legislation, investment markets and taxation rules. You will also need to monitor your investments and make sure they are performing as expected.

What kind of people set up a self-managed super fund?

The appeal of a SMSF begins to kick in around the age of 46, which is the median age of newly established SMSFs, according to the ATO’s Self-managed super funds: A statistical overview 2019–20 report. Both the average and median age for all SMSF members was 61 years.

The report shows that the average SMSF member balance was $696,000, up 1% from 2018–19, and 21% from 2015–16. Interestingly, the average taxable income of all SMSF members was $116,000, while the median taxable income was $65,000.

As of June 30, 2020, 40% of members were in the retirement phase, compared to 38% in 2018–19 and 39% in 2015–16.

How much do you need in a self-managed super fund?

SMSFs with less than $500,000 produced lower returns when compared to Australian Prudential Regulation Authority (APRA) regulated funds, after all fees and taxes were considered, according to an Australian Securities and Investment Commission (ASIC) report on the superannuation sector from 2019.

Total investment returns of SMSFs with balances less than $200,000 were negative after considering tax and fees.

On the flipside, ASIC noted that funds with more than $500,000 had competitive investment returns comparable with conventional super funds, after tax and fees. This is likely due to the increased buying power that comes with larger balances, leading to economies of scale in investment management and other fees.

Larger SMSFs are also more likely to engage professional service providers, which can improve governance and decision-making.

So if you’re thinking of setting up an SMSF, or you already have one, it’s worth considering whether your balance will likely give you the best bang for your buck. If not, you may want to consider consolidating your super into a larger fund.

Of course, there are other factors to consider when making this decision, but it’s something that’s worth weighing up. You may also decide to seek professional advice to support you with your decision-making.

Compare SMSF savings accounts

Self-managed super funds take time and money

The costs of setting up and running a self-managed superannuation fund can be high. There are initial set-up costs and ongoing costs for things such as administration, auditing, compliance and documentation.

In addition, trustees may choose to engage the services of a strategic adviser and investment adviser. Regulatory and registration costs can also add up.

Read more: An advisor’s insight into SMSF setup fees & costs

Depending on the assets held in the SMSF and any professional advice received from SMSF specialists, the running costs can start from $2,000 a year, depending on the complexity of the fund.

For some people, the benefits of having an SMSF outweigh the costs, but it’s essential to be aware of all the potential expenses before making a decision.

The SMSF administrator will complete the fund’s tax returns and financial statements at the end of each financial year, and this may cost from $1,000 a year. Meeting minutes relating to changes in the fund’s circumstances and meetings conducted by members of an SMSF will also be prepared.

The cost will depend on the administrator’s specific fees which are usually determined by the complexity of the fund’s assets.

For example, an SMSF with a bank account as its only asset should have low administration fees, whereas an SMSF with property and a limited recourse borrowing agreement will have higher fees. An SMSF with a share portfolio will generally be somewhere in between.

SMSFs must be audited by an independent auditor each year to ensure compliance with legislation and regulation. This can cost from $400 a year depending on the complexity of the fund.

The ATO’s SMSF Supervisory Levy is a mandatory payment to cover the regulatory oversight of SMSFs. This levy is due annually and costs $259 at the time of writing.

The cost of ongoing financial advice will depend on the complexity of the investments, the number of members in the fund, and possibly the value of the assets. Financial planners typically charge from $2,000 a year for strategic and investment recommendations.

The fees associated with the SMSF’s investments can also be significant.

For example, real estate agent management fees for an investment property can add up, as can brokerage costs for share trading, management fees for managed funds and account keeping fees for bank accounts. It’s important to be aware of these additional costs before making any investment decisions.

Why would you choose a self-managed super fund?

Many people relish the challenge of taking charge of their day-to-day investments and enjoy researching the myriad options available.

Suppose you believe you can beat the market and are willing to make regular financial and investment decisions. In that case, you might be able to establish a fund that outperforms the large institutional investors. There is also the risk you won’t be that successful and keep in mind too that past performance is not a reliable indicator of future performance.

SMSFs also allow couples to combine their superannuation into one fund. There are tax advantages to this when it comes to managing your finances, especially as you move into the retirement phase and begin drawing down income.

Another big attraction of SMSFs is they allow you to purchase residential and commercial property, including your own business premise.

Read more: Investing super in property using an SMSF: How does it work?

Investing in alternative assets such as cryptocurrencies is possible in an SMSF – as well as other items such as artwork, jewellery, wine and other collectables. Care and proper due diligence are extremely important when investing in these assets to avoid any compliance issues.

The risks and responsibilities of a self-managed super funds

Setting up a self-managed super fund is a complex process that can be time-consuming, and ultimately, the buck stops with you. But it can be a great way to supercharge your retirement plans if done correctly.

It is important to remember that you are personally liable for all the decisions made by your SMSF, even if you get help from a professional or another member who makes the decision. With this in mind, be sure to do your research and seek professional advice before setting up an SMSF.

If you’re not good with paperwork or have difficulty understanding the SMSF rules, then an SMSF is probably not for you. An ASIC review found 38% of respondents said running their SMSF was more time-consuming than expected.

SMSF trustees need to ensure compliance with SMSF rules to avoid fines for a non-complying fund. Opportunities could be missed if you don’t take action immediately. Penalties could be imposed if you don’t comply with the rules.

If you and your spouse are trustees of an SMSF and decide to go your separate ways, things can get messy. Unless the divorce terms are amicable, splitting your SMSF will involve family lawyers and large cheques. The type of SMSF structure chosen also plays a part here, whether an individual trustee or a corporate trustee.

SMSFs are not a guaranteed way to ensure success with your retirement savings. They are simply an alternative investment vehicle. If you manage your SMSF correctly, you can reap many rewards.

But if you make even one mistake, it can be costly both in terms of your future financial wellbeing and your personal stress levels. So you need to evaluate the pros and cons for yourself to decide if running your own fund is the best choice for you.

Compare SMSF loans

What to do if you want to set up a self-managed super fund

It’s a good idea to ask yourself why you want to set up an SMSF. If you are interested in accessing investment options and financial products that can’t be accessed in APRA-regulated funds, then this could be a sound reason.

If they stack up financially, investment options such as unlisted securities or commercial property can make sense in an SMSF.

If you are still interested in setting up an SMSF after considering all of these factors discussed above, then it is best to obtain personal financial advice from a financial adviser. They can look at your investment objectives while considering your financial situation to decide if an SMSF is right for you.

Read more: Latest in self-managed super funds (SMSF)

Listen to more

My colleague Gareth Lane and I, the founders of SMSF Mate, caught up with Steve Mickenbecker, Canstar’s Group Executive Financial Services and Chief Commentator, to chat more about how to evaluate whether an SMSF is right for you.

Cover image source: insta_photos/Shutterstock.com