Many people start up self-managed super funds (SMSFs) because they think they will have greater control over their investments. In reality they often end up spending significantly more than they need to be on fees and charges and adding unnecessary complexities to their life.
Before you open a SMSF it is worth considering the pros and cons and making sure you understand your obligations. If you have one, you are not locked in for life. They can be shut down without losing your super. The money can be transferred to another super fund and there are a wide range of investment choices available. These include managed funds, term deposits, Australian and international shares, exchange traded funds, index funds and professionally managed share portfolios. The only thing you really can’t invest in is direct property.
What is a SMSF? An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself. SMSFs can have up to four members. All members must be trustees (or directors, if there is a corporate trustee) and are responsible for decisions made about the fund and compliance with relevant laws. Set up costs and annual running expenses can be high, so it's most cost-effective if you have a large balance.
Managing your own super comes with a lot of responsibility and involves significant time and effort. A self-managed super fund (SMSF) might be suitable if you have a lot of super and extensive knowledge of financial and legal matters.
You must understand your legal responsibilities and the investments you make because, even if you employ professionals to help you, you are still the one ultimately responsible. It involves three major jobs: administration (doing the paperwork), investment (deciding where to place the money); and insurance (arranging appropriate cover).
Pros of using a SMSF SMSFs give you control over how and where your money is invested and there can be fee savings if you have more than $250,000 invested. You can combine your and your spouse’s super balance to create an effective cost saving. They also provide potential to use tax saving strategies. In addition, SMSFs are a vehicle for purchasing business real property and can give you certainty in estate planning.
Why a SMSF may not be for you If you can handle the administration tasks with ease, you are well on your way, but you also need to take into account the assets the fund will hold. If these are not at least $250,000, the setting up costs and annual expenses of an SMSF are probably not worth the exercise.
As a trustee of the fund, you are open to personal litigation if the fund is not run properly and you are responsible for the fund’s investment strategy (although this is established with your financial planner).
Given that much of the work of running the fund will happen after retirement — and probably will be done by one family member — there are two other questions to consider.
First, is this really how you want to spend your retirement? And second, who will run the fund if the person currently doing so dies or becomes incapacitated?
