Since compulsory employer superannuation started in 1992, superannuation funds have grown to almost $3.9 trillion. Along with that growth, Self-Managed Super Funds (SMSFs) have become more popular with over 1.1 million members managing nearly $932 billion in SMSFs across the country.
While SMSFs offer the flexibility and control, they may not be right for everyone. Before you decide to set up an SMSF, you need to understand the risks, costs and responsibilities involved. And you need to consider future performance not just past performance when evaluating superannuation options.
SMSFs Explained
What is a Self-Managed Super Fund (SMSF)?
A Self-Managed Super Fund (SMSF) is a superannuation fund that allows you to manage your own retirement savings. Unlike traditional super funds, an SMSF is a trust structure set up specifically to provide retirement benefits to its members. This is attractive to those who want to take control of their financial future and make their own investment decisions.
SMSFs are regulated by the Australian Taxation Office (ATO) and must comply with strict rules and regulations. Typically, they are set up by individuals with a large amount of superannuation savings who want to take a more active role in managing their investments.
One of the main benefits of an SMSF is the ability to invest in a diverse range of assets, including shares, property and bonds. This flexibility allows you to tailor your investment strategy to your financial goals and risk tolerance. But managing an SMSF requires a lot of time and effort. As a trustee, you are responsible for ensuring the fund complies with all laws and regulations and manage the investments according to the fund’s investment strategy.
Why Do People Set Up a Super Fund SMSF?
One of the key benefits of an SMSF is the ability to have more control over investment choices. Unlike traditional super funds, SMSFs allow you to invest in a wider range of asset classes, including residential property, rare collectables and even physical gold. Plus SMSF income is taxed at 15% which is lower than the marginal income tax rates for medium to high-income earners (30% to 45%). But remember past performance is only one factor to consider when choosing a superannuation fund.
However, despite those benefits, SMSFs come with unique challenges and risks that may not be right for everyone.
Evaluating Your Situation
Before you jump into SMSFs, you need to evaluate your financial situation thoroughly. Start by assessing your current super balance. Generally, having at least $200,000 in your super fund is recommended to be cost effective. Next, consider your investment knowledge and experience. Managing an SMSF requires a good understanding of various investment options and strategies.
Also think about your willingness to take on administrative duties. As an SMSF trustee, you’ll be responsible for compliance, record-keeping and reporting obligations. If you don’t have the time or interest in those tasks, an SMSF might not be the right choice for you. Finally, consider seeking advice from a qualified financial adviser to help you determine if an SMSF is right for you long term financial goals and circumstances.
The Risks and Challenges of an SMSF for Your Financial Future
While the idea of having full control over your retirement savings is appealing, managing an SMSF comes with many responsibilities and potential pitfalls. Remember past performance is not a reliable indicator of future results and multiple factors should be considered when evaluating superannuation options.
1. Investment Strategy
An SMSF requires you to develop and follow an investment strategy. Without proper diversification, you could expose your super balance to unnecessary risk. Many SMSFs have all their funds in one asset, such as residential property, which can leave them exposed to market fluctuations compared to a diversified portfolio in a traditional super fund.
Also consider future performance when developing your investment strategy as past performance is not a reliable guide.
2. Time and Administrative Burden
Unlike standard super funds, an SMSF requires hands-on management. This includes:
- Compliance
- Annual audits
- Investment record-keeping
- Reporting to the ATO
These administrative tasks can be time consuming and if not managed properly can result in penalties. Consider the various services available to help manage these tasks and ensure compliance.
3. Costs
While SMSFs can be cost effective for larger balances, they can be expensive for smaller ones. The general rule of thumb is to have at least $200,000 in your SMSF to be cost effective. Key costs may include:
- Annual compliance and audit fees
- Investment and brokerage fees
- Managed fund fees
- Advisory fees from accountants and financial planners
Ideally these costs should be under 2% of your total super balance. For example if your SMSF has $200,000 in assets your fees should be under $4,000 per year. Also consider the costs of services and other factors when evaluating superannuation options.
4. Keeping up With Changing Legislation
SMSF regulations and compliance requirements change frequently. As a trustee you are responsible for staying informed and ensuring your fund is compliant. If you don’t have the time or interest in keeping up with these changes or if seeking professional advice increases your costs, an SMSF may not be right for you.
Also consider the various services available to help manage compliance and regulatory changes.
Other Options
Other Superannuation Options for Your Financial Future
While Self-Managed Super Funds (SMSFs) offer control and flexibility, they may not be right for everyone. Fortunately there are several other superannuation options to consider, each with its own benefits.
Retail Super Funds: Managed by professional fund managers, retail super funds offer a range of investment options. They are often less expensive than SMSFs and require less time and effort to manage, making them a convenient option for many individuals.
Industry Super Funds: Managed by professional fund managers, industry super funds offer a range of investment options. Known for their competitive fees and strong performance, industry super funds are a popular option for those looking for a balance between cost and investment returns.
Public Sector Super Funds: Tailored for public sector employees, these funds are managed by professional fund managers and offer a range of investment options. They are generally less expensive than SMSFs and require minimal management effort from the individual.
Retirement Income Streams: For those nearing retirement, a retirement income stream can provide a regular income. These products convert your superannuation savings into regular payments so you have a steady income in retirement.
In the end the best superannuation option for you is dependent on your individual financial goals and circumstances. It’s important to seek professional advice to find the right option for your financial future.
Should I Set up an SMSF for Retirement?
While SMSFs offer flexibility and tax benefits, they are not right for everyone. Managing an SMSF requires a high level of commitment, financial knowledge and willingness to handle ongoing administrative and compliance obligations.
If you’re considering setting up an SMSF, weigh up the risks and costs carefully. Past performance is not a guide to future results and multiple factors should be considered when making this decision. Seek advice from a qualified financial planner to determine if an SMSF is right for you long term.
At Insight Wealth, we can help you navigate the complexities of superannuation and SMSFs. Get in touch today for personal advice for your future.