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The pros and cons of a self-managed super fund (SMSF)

Many Australians have opened self-managed super funds (SMSFs) to control their retirement savings. In fact, according to the latest statistics from the Australian Tax Office (ATO), there are 603,432 SMSFs in Australia with a total of 1.1 million members – and the numbers are growing.

The advantages of a self-managed super fund depend on your circumstances, abilities and inclination. However, SMSFs are becoming increasingly popular and appealing for pre-retirees.

Maintaining an SMSF requires extensive financial and legal knowledge which is why competent financial advice is still needed. Before committing to an SMSF, it is important to understand the advantages and disadvantages of SMSFs and how complex it can be to manage it entirely yourself.

In this article, we take a deeper dive into the essential self-managed super fund pros and cons you need to know about, as well as the requirements for setting up an SMSF.

What’s a self-managed super fund?

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First cab off the rank: what’s a self-managed super fund?

A self-managed super fund (SMSF) is a private superannuation fund that you manage yourself. You can have up to six members in your SMSF.

The major difference between an SMSF and other types of funds (such as industry or retail super funds) is that the members of the SMSF are also directors or trustees, which means the members can run the fund for their benefit.

However, the members are also responsible for complying with super and tax laws and must be run for the sole purpose of providing retirement benefits for members and their dependents.

You are in charge and you make all the investment decisions for the fund. This is different to an industry or retail super fund, in which investment decisions are made on your behalf.

You will be able to take a more active role in your retirement savings.

It is important to note that SMSFs are still regulated by the Australian Tax Office and operate under the same regulations as super funds. It is a major financial decision and takes both time and skill to manage.

Before you delve into our self-managed super fund pros and cons, you need to consider if you have the time to manage an SMSF yourself.

What are the requirements for setting up a self-managed super fund?

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The money you put into your SMSF is solely for the purpose of retirement. You must:

  • Keep comprehensive records and submit them to an SMSF approved auditor like Elliot Watson Financial Planning
  • Choose individual trustees or a corporate trustee
  • Create a trust and trust deed
  • Register your fund and get an ABN
  • Have the financial skills to make the required appropriate decisions
  • Follow an investment path with acceptable risk tolerances
  • Be ready to play the role of a trustee with the responsibility of making decisions that have legal implications
  • Be ready to spend time researching investment opportunities
  • Consider insurance including life cover, income protection and disability cover for the fund members.

It is also recommended to create an exit strategy for your fund. You need to consider what happens when your SMSF ends — unexpected things happen like a breakdown between trustees, the death of a trustee or an illness/accident that leaves a trustee incapacitated.

An exit strategy can reduce the impact of unexpected events like these. A few strategies you can use include:

  • Ensure all trustees have access to the SMSFs records and electronic transaction accounts
  • Create rules for the fund to be triggered in the event of an unexpected event
  • Make binding death benefit nominations (and renew them every three years)
  • Encourage all members to appoint a power of attorney.

Self-managed super funds: pros and cons

Before making the switch, there are several pros and cons of self-managed super funds that it’s important to be aware of. While SMSFs can have several important benefits, they’re not for everyone.

So, what are the pros and cons of self-managed super funds? How can they benefit your retirement savings? First, let’s start with the advantages of SMSFs.

Advantages of a self-managed super fund

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The advantages of a self-managed super fund are numerous. If you have the time and expertise to run a super fund yourself, it can be very rewarding and freeing.

Here are just a few of the advantages of a self-managed super fund.

#1. Control

Unlike other superannuation funds, the members of an SMSF have complete control over the fund. This means that they decide the investment path the fund will take. This can be crucial when deciding to take advantage of new opportunities that otherwise seem risky for ordinary super funds.

You can decide to invest in a wide range of assets including securities, managed funds, fixed interest investments, residential and commercial property, just to name a few.

#2. Quicker decision making

Making quick decisions can make a lot of difference in the performance of a fund.

Decisions can be made quickly to invest in profitable trends and equally made to get out of losing trends.

#3. Lower costs for bigger funds

Running your own SMSF can provide the benefit of lower ongoing costs. The estimated operating expense ratio on SMF is at 0.5 per cent.

However, the ATO explains that the bigger the fund, the lower the operating cost ratio.

Disadvantages of a self-managed super fund

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While there are a number of advantages to an SMSF, there are also a number of disadvantages. It is worth weighing up the pros and cons before committing to an SMSF.

#1. Time-consuming

Researching suitable investment paths takes a lot of time. Running the SMSF is a continuously engaging affair since you must keep tabs on your investment’s performance.

 #2. Financial & legal risks in decision making

For SMSF members without a background in finance and tax, setting up and managing an SMSF can be quite a challenge.

Poor decision making could lead to financial and legal consequences, especially in matters of taxation.

#3. Inability to access government compensation schemes

SMSFs cannot access government compensation schemes in case money is lost for various reasons including those outside the control of the trustees.

#4. Reduced access to dispute resolution bodies

SMSFs have limited access to dispute resolution bodies meaning that the fund is at risk of damaging consequences if the directors/trustees are not able to access competent legal aid.

Resolving disputes through conventional courts imply higher costs for an SMSF.

The importance of ongoing financial advice

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While self-managed super funds can be incredibly beneficial, it’s essential to weigh up the main pros and cons of SMSFs and assess how they align with your financial goals.

It is crucial that an SMSF access sound financial advice. It is highly recommended that you seek the services of a financial planner before deciding to set one up. The adviser will outline the risks involved in running an SMSF.

After setting up an SMSF, a financial planner can assist in the administration of investment decisions of the fund.

However, it is important to note that a financial adviser only makes recommendations and the responsibility of executing those rests on the trustees. It is important to use an experienced financial adviser for the following reasons:

#1. Better quality investment research

A financial adviser can help identify investment opportunities that SMSF members are overlooking. The adviser can also help filter through several investment choices for the one that is suitable based on your goals and objectives.

#2. Avoiding financial & legal pitfalls

For SMSF members without adequate financial and legal skills, a financial adviser is helpful in minimising risks. The adviser can make recommendations on things like taxation, membership, financial compliance and so on.

#3. Easier day-to-day administration

It is possible to delegate authority to a financial adviser to make transactions on your behalf.

This can relieve the SMSF members from the pressure of day to day management tasks and keep tabs on various investments.

The decision to put your superannuation into an SMSF should not be taken lightly

Before changing over to an SMSF, it is recommended that you seek advice from an experienced financial planner. With their help, you can weigh up the pros and cons of SMSFs and work out if starting one is right for you.

At Elliot Watson Financial Planning, we understand that there’s no one-size-fits-all solution when it comes to investment strategies. We work with our clients to unpack the advantages and disadvantages of SMSFs and create the right investment strategy for your unique financial situation. We also provide expert advice across a range of financial services including investment options, tax benefits, superannuation and tax laws, and more.

For more recommendations on superannuation funds, contact Elliot Watson Financial Planning to discuss your superannuation needs on (02) 4038 1623.

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. 

Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.

The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author.

Elliot Watson Financial Planning Pty Ltd is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.

Jose Hernandez

Jose Hernandez is a financial adviser. He believes that financial planning is the strong foundation on which Australians can build their future. Get in contact with Jose to discuss your financial goals 02 40381623.

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