SMSF: can you really afford to have one?
Self managed super funds (SMSFs) are often seen as a means to having more control over your retirement savings. By selecting and managing your own investments, you’re bound to make the right decisions – correct? Well for some people, SMSFs work well, particularly if there is business or real property to be invested. But for a growing number, an underestimation of how much time and money it actually takes to manage an SMSF in accordance with the rules has led to many winding up their SMSFs.
The first question people often ask is how much money do you need to start an SMSF? The Australian Securities & Investments Commission (ASIC) makes it very clear that SMSFs with balances less than $200,000 are more expensive than industry and retail funds*. Therefore, it may not be in your best interest to begin an SMSF if your balance is under this amount.
The next question is what’s involved in running an SMSF? As an SMSF is a legal structure that is regulated by the Australian Taxation Office (ATO), there are strict guidelines you need to follow. You will need to use the money only for your retirement savings, keep comprehensive records and arrange annual audits, budget for ongoing expenses, such as accountant fees and professional advice. As the SMSFs trustee, you will also need enough financial know-how and experience to make decisions about your money, including managing the ups and downs of your investments.
Many people also believe that by running an SMSF, they can invest the money as they choose. However, there may be excluded investments, which will be listed in your Trust Deed. There are also legislative restrictions, for example when borrowing money to invest in shares or property, buying a property to use as a holiday house, and buying assets from parties related to the SMSF.
There is a course that you can do if you’re seriously considering running an SMSF. The Self-Managed Superannuation Funds Trustee Education Program is run by CPA Australia and is free to undertake.
You may also wish to ask yourself the following questions before moving out of your current super fund:
- Do you know enough? – are you fully aware of the legal and tax requirements of SMSFs?
- Do you know the costs involved? – consider the ongoing legal, advice and auditing costs of an SMSF.
- Will you lose out on cover? – many super funds offer default insurance cover. If you begin an SMSF you will have to arrange your own cover – which may be more expensive.
- Will you actually benefit? – consider the performance of your super fund and evaluate if your SMSF can actually deliver a better outcome.
- Do you just need a different super fund? – if you’re considering an SMSF because you’re unhappy with your current fund, maybe you should think about simply switching funds.
- Does your fund offer a DIY super option? – some super funds offer you the option to be more hands on with a percentage of your superannuation assets where you can choose your investments. These can offer some of the features of an SMSF at a fraction of the cost.
One example of a DIY option is AustralianSuper’s Member Direct option which offers you the opportunity to take more control of how your super is invested, while still being able to benefit from low fees, insurance cover and professional advice.
Also, because Member Direct exists within AustralianSuper, which is regulated by the Australian Prudential Regulation Authority (APRA), it offers important protections if something goes wrong. This includes access to Superannuation Complaints Tribunal (SCT), and compensation for loss resulting from theft or fraud. Many of these protections won’t be available to you if you have an SMSF. Setting up an SMSF is a big decision and a large commitment, so make sure you have sought appropriate advice to fully understand your options.
* Source: Costs of Operating SMSFs –ASIC, Rice Warner Actuaries, May 2013.
This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, the Trustee of AustralianSuper ABN 65 714 394 898. The views are of YourLifeChoices and not those of AustralianSuper. The article contains general information and you should consider your personal financial situation before making a decision.
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