Self-managed super funds (SMSF) can be beneficial to securing your financial independence. But is a SMSF the right option for you?
What is a SMSF?
Self-managed super funds essentially present a do-it-yourself approach to managing your superannuation.
SMSFs can be single member, or comprised of up to four members. Members of a SMSF also act as trustee or director of a corporate trustee, and together, the trustees control and and invest the funds assets.
Trustees of SMSFs assume responsibility for the overall investment strategy, subsequent profitability and tax compliance of the fund.
Essentially, in a SMSF, you’re replacing the super fund management organisation that traditionally manages retail superannuation funds.
SMSFs tend to appeal most to business owners, entrepreneurs, high-net-worth individuals and those with specific investment expertise who wish to take control of their financial future.
Is a SMSF right for me?
There are several benefits of a SMSF, however it also comes with serious responsibilities that may not be appropriate for everyone.
The first aspect to consider is the current size of your superannuation investment. SMSFs do attract administration fees that can vary quite widely depending on your specific situation. Generally, you can expect to pay around $2,000 plus in admin and audit fees annually. (Allied Business Accountants fees for administration are fixes at $1,680 per year)
To put yourself ahead of retail super funds you’ll want to spend less than 2% of your balance on annual admin fees, and less than 1% to put yourself ahead of industry or wholesale funds.
That means the higher your super balance, the more value an SMSF represents. Generally speaking, you’ll want to start an SMSF with a minimum of around $200,000 to make sure it’s cost effective, however you can start with a lower balance if you wish.
You’ll also need to take your own investment expertise and knowledge of superannuation rules into account before starting a SMSF. As a trustee, you’re responsible for the investment decisions you make, and for ensuring you comply with compulsory audits and the SIS act.
While you can call in tax and investment professionals to help you, the buck stops with you, so it’s important that you’re comfortable shouldering that responsibility.
What are the advantages of a SMSF?
With that said, there are a range of benefits you can reasonably expect to reap from SMSFs.
The most obvious benefit of a SMSF is the greater control it offers. This can be particularly important to people with investment expertise who are looking for a more dynamic superannuation solution they can quickly align with shifting market conditions, or for those with access to trusted financial advice who seek more direct and immediate control over their investments.
SMSFs also tend to offer greater investment choice than retail or industry funds. That is, a SMSF trustee can choose to invest their money in anything from property and shares to more exotic investments such as art work and collectibles (rules apply to the latter).
As such, SMSFs allow you to employ more sophisticated investment strategies and make it easier for you to mobilise your super to invest in lucrative opportunities as they arise.
With the right tax professional in your corner, a SMSF can help you optimise your tax position through strategic tax planning and structuring. This can be particularly beneficial for self-funded retirees seeking a tax-free income stream.
SMSFs also offer extra flexibility when it comes to estate planning. Standard wills can’t necessarily control superannuation benefits held in retail funds, while SMSFs can be set up to leave tax-effective income to nominated dependents.
Also, new rules allow SMSFs to borrow money under certain conditions, which means trustees can now leverage their investments with funds borrowed from the bank or from related parties.
And when it comes time for retirement, SMSFs offer the most flexible and tax-effective pension planning options, along with excellent asset protection capability.
What else do I need to consider?
While SMSFs can deliver a range of benefits, it’s important to go into it with your eyes open.
You must be willing to make the time commitment that comes with managing your own superannuation, along with the costs that will arise in administration, accounting and audit.
Critically, with new administrative penalties applying to trustees of non-compliant SMSFs from 1 July 2014, it’s even more important for trustees to follow the letter of the law.
Under the new regulations, the ATO will have the power to impose monetary penalties, prescribe mandatory education programs and direct rectification actions on any SMSF trustee that does not comply with the SIS Act.
Monetary penalties can range from $850 for failing to put an investment manager appointment in writing, to $10,200 for failing to notify the ATO of an event that has significant adverse effect on the fund’s financial position.
As such, it’s advisable to seek assistance from a SMSF professional to manage the compliance requirements order to avoid penalties or prosecution.
While the potential benefits of a SMSF are high, it’s important to be realistic about the compliance aspects and time commitment involved.