There are many different ways to manage your superannuation. Some methods are very simple, with a very low cost but not a whole lot of flexibility, while others give you all the flexibility you could hope for but come with added complexity.
Today we are talking complexity. We are talking self-managed super funds (SMSFs) which will give you the greatest flexibility but at the cost of added compliance, administration and tax obligations.
An SMSF is basically a super fund that you run yourself. This involves setting up your own fund whereby you are the trustee of the fund and you’re responsible for managing and maintaining that fund.
Like with most things in finance, an SMSF is suitable for some people but not others. There are pros and cons of operating your own SMSF and whether or not it is appropriate for you really is going to depend on your situation and what you are trying to achieve.
So, today I want to run you through some of the reasons why an SMSF might be suitable and also cover off some reasons as to why you shouldn’t have an SMSF. A lot of the time I find people start an SMSF for the wrong reasons and this can lead to unnecessary cost and complexity.
Reasons you would consider an SMSF
Let’s kick things off with the reasons why you may want to start an SMSF. Below I have listed some of the primary reasons I believe an SMSF may be useful.
- Purchase an investment property. Australians love investing in physical property and an SMSF allows you to do this using your superannuation funds.
- Purchase a commercial property for your business. Business owners may be able to purchase a commercial property via their SMSF and use the property to operate their own business. This means they can pay their super fund rent instead of paying a third party.
- Purchase of other unique asset classes. You can basically invest in anything via an SMSF provided you operate within the rules. This opens up your world of investing to assets such as crypto currency, artwork, any shareholding worldwide, physical commodities, etc.
- Ability to pool superannuation balances. You can have up to four members in an SMSF. This allows you to combine balances with family or friends to purchase larger assets that you otherwise wouldn’t be able to fund. There is proposed legislation to increase the number of members to six.
- Ability to borrow inside superannuation. Although I typically think this is a really bad idea, you can actually borrow inside superannuation to leverage into large assets such as property.
- Capital gains tax (CGT) flexibility. By operating your own SMSF you can transfer assets from accumulation phase to pension phase to avoid accrued CGT. Many industry and retail funds will force you to sell the asset upon transition from accumulation to pension which will realise the capital gain and lead to CGT.
- Deferral of contributions tax. The payment of contributions tax is be deferred until it is actually due, allowing investment earnings to accrue on those funds until they become payable, unlike many larger funds that deduct the tax from a members account at the time the contribution is made.
- Estate planning. SMSFs generally have better flexibility when it comes to the payment of death benefits over a typical public offer fund.
- Cost control. As you are in charge of operating the SMSF you have control over the platforms and services you use which means you have some control over the operating costs. However, please bear in mind that SMSFs typically are not cost effective for small fund balances as there are a number of fixed costs such as the annual accounting and audit fees.
As you can see, there are a lot of potential benefits that come with an SMSF. However, with the good comes the bad and that’s what we need to consider next.
Reasons why you shouldn’t have an SMSF
Below are some of the reasons why you wouldn’t start an SMSF. Again, not all of these will apply to you but you consider them before taking the plunge.
- Considerable work involved. As the trustee of your own fund you are responsible for the compliance, administration and investment of the fund. There is a lot of work involved and knowledge needed to execute this to an acceptable standard. You can take on a Financial Adviser to assist but this will obviously come with additional cost.
- Fixed costs. Although SMSFs gives you more flexibility around costs (as previously discussed) they are typically not cost effective for small fund balances due to necessary fixed costs such as accounting and audits. It is generally advisable that you should not start an SMSF unless the fund balance will be greater than $300,000.
- Living overseas. In order for your fund to remain compliant the majority of an SMSF’s members must permanently reside within Australia. Generally, members cannot reside overseas for longer than 2 consecutive years.
- Flexibility can lead to poor investment outcomes. Some people use an SMSF as a means to invest in highly speculative asset classes. This often ends in tears. I am not against using a small amount of money to speculate but retirement savings should generally be invested in rock solid strategies which preserve capital as much as possible. Don’t gamble with your retirement funds!
- Inability to access government compensation schemes. SMSFs cannot access government compensation schemes in case money is lost for various reasons including those outside the control of the trustees.
So, with the good comes the bad and I can’t stress enough the importance of understanding the compliance obligations that come with operating your SMSF. This is not to be taken lightly.
I worry that a lot of people start an SMSF as a status symbol. It sounds fancy to have your own super fund and sometimes people think that because it’s complex it must be better and more sophisticated. In reality, complex doesn’t mean sophistication it means a headache. The best financial plans are the ones that are simple to execute.
If all you want to do is have a good, diversified portfolio of stocks, bonds and maybe a term deposit or two, then you don’t need an SMSF. A good retail fund will give you access to all of this and more without the compliance hassles and time commitments.
Some of the public offer funds out there today really are quite extraordinary! They offer an amazing array of investments, with awesome reporting, all at a reasonable cost.
I don’t personally have an SMSF simply because I don’t need one. The superannuation fund I use gives me sufficient flexibility to invest in the assets that I want to invest in. The only time I could see myself starting an SMSF is if I wanted to purchase an office to operate my business out of.
But if you do decide to start your own SMSF, I would strongly suggest that you get professional advice first to ensure you are on the right track from a compliance perspective. Feel free to reach out if you would like my assistance here.