Is an SMSF right for you?
- Financial Planning
There is no doubting that self-managed super funds (SMSFs) are a popular choice for Australians when it comes to saving for retirement. The latest statistics from the Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO) indicate that in June 2017, there were almost 600,000 SMSFs in operation1, and they controlled almost $700 billion in assets2. This represents nearly one-third of the country’s total super assets of 2.3 trillion.
Almost 30,000 new SMSF funds were established in the 2016-17 tax year1, which continues a consistent pattern of growth in this sector.
So what is the attraction?
The idea that you are the master of your own superannuation destiny is certainly a major driver behind this stellar growth in SMSFs. Being able to set your own investment strategy, and the increased scope in investment options — such as direct property investment and collectibles — has attracted many to this form of superannuation saving.
Many also believe that costs can be minimised if they run their own show, giving them more flexibility on when they can move to retirement and start drawing a pension from their accumulated funds. Some may also be attracted to the idea of cycling some of their super investment back into their own business, such as through using their fund to purchase business premises.
There are also some advantages that SMSFs provide in relation to estate-planning. For example, a death benefit can continue to be paid to a dependant in the form of a pension, which means the super fund doesn't have to be closed upon death.
Is there a downside?
Of course, it is not all plain sailing when it comes to running your own super fund. There are many obligations placed on you as a trustee and there are traps that may end up costing you money if you don’t get the right advice.
Having a SMSF involves a commitment to running the administration, compliance, and investment strategy for your fund and there are stringent rules to be followed. If you slip up, there are significant financial penalties that may be applied. In short, the buck stops with you.
Certainly, you can obtain advice and assistance to manage the administrative and investment burden, but this comes at a cost, so it is important to weigh up the advantages against the costs and risks.
A major factor in deciding whether a SMSF is right for you is the size of your super assets. While there is no prescribed minimum for setting up your own fund, the generally accepted wisdom is that you need a substantial starting sum in the hundreds of thousands to make it worthwhile, and to create the cost efficiencies that can compare favourably with using a retail managed fund.
So are you better off in a managed fund?
SMSFs have some attractive advantages, but they also have potential pitfalls. For some of us, a retail managed fund may be a better option, particularly if you are not prepared to take on the responsibilities that come with running a SMSF.
Managed funds have the advantage of taking care of all the trustee responsibilities and fund administration on your behalf. For some, this can be the deciding factor.
While managed funds cannot provide all of the investment options and flexibility that are possible in a SMSF, they can still provide highly sophisticated and diverse asset allocations that can match well with your desired investment preferences and risk profile. They also have the potential to generate significant returns.
Cost-wise, you know upfront what a managed fund will charge in terms of entry, exit, and management fees. The question of whether this will be more or less than the costs of running your own SMSF does not have a simple answer. Generally speaking, it will depend greatly on the size of your super assets: The higher the balance, the more scope there is for SMSFs to have a cost advantage.
Weighing the pros and cons
The telling factor in whether an SMSF is right for you will often come down to getting the right advice that takes your specific circumstances into account. There will never be a cut and dried answer on whether a SMSF is your best option because of all the variables relating to cost, investment strategy, administrative obligations, insurance, and personal desire to control your own fund.
A financial adviser can help you weigh the benefits against the risks to make an informed choice that suits your personality and financial situation. They can also give you expert advice on how to best manage the responsibilities of running a SMSF using specialised service providers. Seeking such advice could well be the best first step to take.
1 Australian Tax Office SMSF Statistical Report.
2 Australian Prudential Regulation Authority.
What do you feel are the greatest risks and benefits of running an SMSF? Share your thoughts below.