More people are taking control of their retirement savings by starting a self-managed super fund (SMSF). While SMSFs are becoming increasingly popular, a number of people are still unsure exactly how these funds operate and whether a SMSF is the right option for them.
To help you decide what type of super is right for you, I’ll be sharing a series of posts about self-managed super in the coming months. For part one of the series, here are five things you should know about SMSFs.
1. What is a SMSF?
A SMSF is not that dissimilar from standard super funds, which strategically invest your money. With a SMSF, you take a DIY approach where you assume total control over how this money is invested. This framework allows you to take a greater level of risk in order to increase the return on your super investment.
The difference between self-managed super and other investments you may have is that a SMSF must be operated within a set of strict legal guidelines. Funds can have up to four members, each of whom is a trustee.
2. You choose what you invest in
With a SMSF, you can invest in the following:
- Term deposits
- Managed funds
- Collectibles such as antiques, jewellery and artwork
Before you go ahead and start investing, however, you must have a documented investment strategy.
3. There are a number of costs involved
A lot of people want to start a SMSF to avoid paying superannuation fees, but the reality is that you’ll still encounter a number of costs with a SMSF.
Because there are so many costs involved, you do need a substantial sum of money to make a SMSF worthwhile. Many financial experts have varying opinions on how much money is the benchmark, but $200,000 is commonly advised.
There are a number of online providers with lower administration costs, which means you may no longer need quite so much money for a SMSF to be a viable option. Alternatively, if you are planning to make substantial contributions to the fund in the next couple of years, this sum doesn’t matter as much either. Ensure you seek financial guidance before deciding whether this is the case for you.
Costs of a SMSF include:
- Setting up the fund
- Annual audits
- Asset valuation
- Accountant fees
- Financial planning fees
- Any legal fees
- Administrator costs
- Winding up the fund
Depending on how involved you want to be in the management of the fund, you won’t necessarily need to pay all of these fees. Work out a situation that matches your level of investment expertise and how much time you have to dedicate to the fund. For example, you may not need a financial planner, but you might require the help of an administrator if you are short on time.
Another cost to consider is life insurance. While it isn’t technically a direct expense of running a SMSF, it may be an extra cost to consider if your only source of life insurance is that provided by your current superannuation fund.
4. You can gain valuable tax savings
As well as gaining more control over your investment, you’ll also receive the added benefit of generous tax concessions with a SMSF. Fund contributions and returns are taxed at a lower rate than other sources of income, which means you keep more of the money for your retirement.
5. You must know your legal responsibilities
No matter how much professional advice you seek for you fund, you are the one who is liable for all decisions made by the fund. You must be aware of all your legal responsibilities and adhere to them. Make sure you understand exactly what your advisor is doing, as any consequences fall back on you, not them. Ask as many questions as necessary to ensure you are well informed.
Depending on how experienced you are in investing, you may wish to consult a financial advisor for assistance with your SMSF. Finding the right person for the job can take time, but it’s worth being thorough in your research, as a good financial advisor can be worth their weight in gold (or super in this case).
A good financial advisor will:
- Outline costs of establishment, management and winding up a SMSF
- Highlight other considerations to be made before switching to a SMSF
- Provide advice on the correct governance structure for a fund
- Ensure you have a suitable investment strategy
- Regularly reassess the suitability of a fund
ASIC has more information on how to choose a financial planner.
Is self-managed super right for you?
If you do your research, understand the risk and are willing to commit time to it, an SMSF might be the right decision for you. You must be prepared to take a greater level of interest in your super and get yourself up to speed with the relevant legislation. Remember that regular super funds are managed by some of the country’s best financial minds, so you need to be sure you can get better results by managing your money yourself. I recommend seeking financial advice before making a decision.
SMSFs and property investment
Residential property is one of the investments you can make using a SMSF. In a review earlier this year, ASIC found the number of residential properties purchased through SMSFs is up by 11% since mid-2014. Next month, I’ll continue this SMSF series by looking at how you can use a SMSF to purchase property.
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