For most people, their superannuation fund is their second-largest asset after their home. So it’s vital to ensure that it’s healthy, secure and well managed. Standard super funds, like retail or industry funds, will supply you with steady returns and require little input or attention. However, self-managed super funds (SMSF) offer a range of benefits over standard funds.
The main difference between a regular super fund and a SMSF is that SMSF members are also the fund’s trustees. While the largest super funds can have millions of members and manage hundreds of billions in assets, SMSFs have a maximum of four members, all of whom must be directors or trustees. This means that SMSFs are run by the members and only for the benefit of the members. And it’s the fund’s members who are responsible for compliance and investment decisions and strategy.
While there are plenty of benefits to setting up a SMSF, they do require considerable financial skills and literacy and can be complex to manage. Ultimately, you will be responsible for complying with all superannuation and taxation laws, which means your decisions will have both legal and financial consequences. However, if you have the time and the know-how, they can offer significant benefits over standard super funds.
So let’s have a look at some of the benefits of self-managed super funds.
Total financial control
With a SMSF, you are in total control of your super and where it’s invested. This means you have complete transparency over where and how your money is invested.
You are also in charge of the overall investment strategy, which means you get to decide on the level of risk you expose your super to.
With complete financial control, you also have the benefit of being able to make quick decisions. Being able to move quickly means you are better positioned to take advantage of investment opportunities or market shifts as they arise.
Wider range of investment options
A SMSF gives you the freedom to decide on the type or mix of assets you want to invest in. It also allows you to invest in a wider range of asset classes. This includes physical assets that standard super funds don’t invest in, such as residential and commercial property, art, antiques and collectibles and even gold and other precious metals.
Investing in property can be an attractive option as you can earn rental income as well as enjoying the capital gains of the property value.
As long as the asset passes the sole-purpose test and your SMSF complies with ATO regulations, you will have much more flexibility in your investment choices.
Operating a SMSF gives you access to various super tax benefits. Unlike regular income, tax on super income is capped at 15% during the accumulation phase, with no tax obligations in the pension phase. This means that you get a nice tax break on any income that your super investments generate. Getting maximum tax benefits from your SMSF can be complex, so it’s worth consulting a good tax accountant.
Include family members
Since a SMSF can include up to four members, you can combine your family members’ super funds into a single fund. This can reduce the fees and costs associated with running four separate funds. It will also increase the fund balance, which gives you more money to play with, increasing your investment options. Additionally, SMSFs tend to become more cost-effective the larger they become due to ATO fees being capped not based on a percentage of the super balance.
What you should be aware of
While there can be significant benefits to setting up and managing a SMSF, there are also some major risks.
As a trustee of your own super fund, you are legally responsible for ensuring the fund is in full compliance with all ATO regulations. Heavy fines apply if your fund breaches tax laws.
The regulations governing SMSFs are not static and regularly undergo revisions. While you may be fully compliant this year, the regulatory environment may change next year. It is your responsibility to make sure that your fund complies with any changes to fund regulations.
Unless you’re smart about it, a SMSF can be much more expensive to manage than a standard super fund. There is a range of associated costs including setup costs, annual reporting and auditing fees, admin and investment fees and more. Depending on your level of financial knowledge, you may also have to consult a range of financial professionals to help with administration, management and investment strategy. And this can significantly increase the costs associated with managing the fund.
If you’re not sure if a SMSF is for you, it’s worth consulting a financial advisor. A SMSF is a great way to take control of your retirement fund, but it’s not without its risks.