Self-Managed Super Funds (SMSFs) have become increasingly popular in recent years, with many individuals and small business owners turning to them as a way to take greater control of their retirement savings. However, as with any investment strategy, SMSFs come with their own set of advantages and disadvantages. In this article, we take a closer look at what an SMSF is, some of the positives and negatives associated with self-managed super funds and the importance of ongoing financial advice.
What is a self-managed super fund?
A self-managed super fund (SMSF) is a private retirement fund that provides individuals with greater control over their investment decisions. With an SMSF, you can have up to six members and all members also serve as directors or trustees. This means that you are responsible for running the fund and making investment decisions that will benefit you.
While an SMSF provides greater control over your retirement savings, it also comes with added responsibility. Members must ensure that they comply with superannuation and tax laws, and the fund must be managed solely to provide retirement benefits for members and their dependents.
Note – It is important that SMSFs are still regulated by the Australian Tax Office, and therefore, they must comply with the same regulations as other super funds. As a result, managing an SMSF requires a significant amount of time and skill. Before deciding to set up an SMSF, it is important to consider if you have the necessary skills and knowledge to manage the fund effectively.
The pros of an SMSF
Positive #1: Control – One of the biggest benefits of an SMSF is the level of control it gives you over your investments. As the trustee of the fund, you have the power to choose the investments you make, which means you can invest in assets that you are confident in and that align with your investment goals. This level of control is not possible with traditional superannuation funds.
Positive #2: Flexibility – Another major advantage of SMSFs is their flexibility. With an SMSF, you can change your investment strategy as your circumstances change. You can adjust your investment strategy to align with your financial goals, which means you can take advantage of market opportunities as they arise.
Positive #3: Tax Benefits – SMSFs also offer several tax benefits. For example, if you are a small business owner, you can use your SMSF to purchase commercial property, which can provide a tax-effective way to grow your business. Additionally, if you are nearing retirement, an SMSF can provide you with greater control over your tax position.
Positive #4: Cost-Effective – While there are some costs associated with running an SMSF, it can be a cost-effective option when compared to traditional super funds. With an SMSF, you only pay for the services you require, which means you can tailor your fund to your needs and avoid paying for unnecessary services.
Positive #5: Estate Planning – SMSFs also offer greater control over estate planning. As the trustee of the fund, you have the power to choose who receives your superannuation benefits in the event of your death. This means you can ensure that your super benefits are distributed according to your wishes.
The cons of an SMSF
Negative #1: Risk – One of the biggest risks associated with SMSFs is investment risk. As the trustee of the fund, you are responsible for making investment decisions, which means that if the investments perform poorly, you could suffer significant losses.
Negative #2: Time-Consuming – Running an SMSF can also be time-consuming. As the trustee of the fund, you are responsible for ensuring that the fund is compliant with all relevant regulations, which can be complex and time-consuming.
Negative #3: Cost – While SMSFs can be cost-effective, they can also be expensive to set up and run. There are several costs associated with running an SMSF, including accounting fees, audit fees, and legal fees. Additionally, if you have a low balance, the costs of running an SMSF may outweigh the benefits.
Negative #4: Lack of Diversification – Another potential downside of SMSFs is a lack of diversification. With an SMSF, you are responsible for making investment decisions, which means that if you do not have the necessary knowledge and expertise, you may make poor investment decisions or fail to diversify your portfolio effectively.
Negative #5: Compliance Requirements – Finally, SMSFs come with several compliance requirements that must be met to ensure that the fund is compliant with all relevant regulations. This can be complex and time-consuming, and failure to comply with the regulations can result in significant penalties.
Note – If you suffer losses due to fraud or theft, SMSFs aren’t eligible to access government compensation schemes or the Australian Financial Complaints Authority (AFCA). Additionally, moving from an industry or retail super fund to an SMSF could result in losing insurance. Refer to the MoneySmart website for more information.
The importance of ongoing financial advice to maintaining an SMSF
Getting financial advice is critical to setting up and managing a sustainable and compliant self-managed super fund (SMSF).
A good financial advisor can help you assess the risks involved in running an SMSF and assist in the administration of investment decisions. However, it’s important to remember that the ultimate responsibility of executing those decisions rests on the trustees.
Here are three reasons why it’s essential to use an experienced financial advisor for your SMSF:
#1. Informed and objective investment research
A financial advisor can provide a wealth of knowledge and experience in identifying investment opportunities that SMSF members may not have considered. They can also help filter through a range of investment options and choose the ones that align with your goals and objectives.
#2. In-depth knowledge of taxation and superannuation law
SMSF members without adequate financial and legal skills can benefit from the guidance of a financial advisor to help minimize risks. A financial advisor can make recommendations on areas such as taxation, membership, financial compliance, and other legal requirements.
#3. Delegating administration
Delegating the authority to make transactions on your behalf to a financial advisor can be an effective way to relieve the pressure of day-to-day management tasks and keep tabs on various investments. This way, SMSF members can focus on other important aspects of running their business or personal life.
Note – However, it’s essential to note that the SMSF members still have the final say in making investment decisions. A financial advisor only provides recommendations based on their knowledge and expertise. It is important to have a trustworthy relationship with your financial advisor and to ensure that you’re on the same page when it comes to your investment goals.
SMSFs: not a decision to be taken lightly
Self-managed super funds offer several advantages, including greater control, flexibility, tax benefits, cost-effectiveness, and estate planning. However, they also come with their own set of risks and disadvantages, all of which require careful consideration before starting out.
For those wishing to embark on establishing an SMSF, getting financial advice is crucial. The benefits of having an experienced financial advisor on board far outweigh the costs. They can provide valuable insights into investment opportunities, help avoid financial and legal troubles, and ease the burden of day-to-day administration.
SG Advisory has a team of superannuation experts who can assist in providing you with the very advice and guidance you need to establish and maintain your own SMSF.
So make an appointment to see one of SG Advisory’s superannuation experts today.
Disclaimer: The information above is general in nature and should not be considered personalised superannuation advice. Please consult one of our experienced staff as superannuation laws, regulations and the way they affect your business can differ from year to year.