Thinking about the pros and cons of self-managed super funds?
Make sure you know what you’re getting into first. Clients often get excited about setting up an SMSF after chatting with mates at a barbecue.
But it’s a big responsibility.
We’ll cover what SMSFs involve, their benefits and potential challenges. That way, you can decide if they fit your retirement plan.
What is a self-managed super fund (SMSF)?
SMSF is a type of superannuation fund where members also act as trustees. You manage the fund and determine how to invest its assets.
Unlike larger super funds run by professional managers, these funds put you in control. You can tailor your investments to fit your goals.
An SMSF can include up to six members, allowing families the flexibility to pool resources. Compliance requirements stay the same, no matter how many members you have.
You can choose to have individual trustees, where each member acts as a trustee or a corporate trustee, which involves setting up a company to act as the fund’s trustee. The structure you select affects the legal responsibilities and administrative requirements.
It’s important to consult a qualified accountant, lawyer or SMSF auditor when deciding which structure best suits your situation. We can help you weigh the pros and cons of each option and ensure that your decision aligns with your long-term financial goals and compliance requirements.
Advantages of SMSF
If you’re prepared to take on the responsibility, a self-managed super fund can offer several potential benefits:
Investment Control and Flexibility
With an SMSF, you control how to grow your retirement savings.
Make your own investment plan by choosing from options like direct shares, managed funds, or property.
Stability for Business Owners
For business owners, SMSFs provide the opportunity to purchase commercial property, such as your office space. Owning your premises through an SMSF offers long-term stability, shielding you from sudden landlord changes.
Additionally, this setup can enhance retirement savings by generating rental income, provided all transactions adhere to the ‘arm’s length’ rule, which ensures that deals are conducted as if they were made with an unrelated party at market value.
Customisation of Investment Strategy
SMSFs allow for a personalised approach to investing.
Some members may prefer to avoid certain industries or investments that don’t align with their ethical or financial values. Having direct control over the fund gives you the flexibility to shape an investment strategy that suits your preferences.
Ability to Involve Family Members
The change from a previous limit of four means larger families can now benefit from collaborative retirement planning.
Cons of SMSF
While the advantages are attractive, SMSFs also come with significant challenges. Here are some key drawbacks to consider:
Increased Responsibilities and Time Commitment
Running an SMSF means taking charge of everything—from choosing investments to handling compliance and reporting. This can be time-consuming and unsuitable for those not ready to commit to ongoing management.
You still have to prepare financial statements, file tax returns and arrange annual audits.
Your legal duties as trustees require you to complete these tasks yearly.
Failure to comply with these requirements can lead to hefty fines and penalties from the Australian Taxation Office (ATO), including having the SMSF deemed non-compliant, which could significantly impact your retirement savings.
Strict Compliance Requirements
SMSFs operate under strict legal requirements.
It should be noted that you cannot use SMSF funds like personal bank accounts. They are primarily designed to provide for retirement.
Accessing funds before meeting a ‘condition of release’ (such as reaching retirement age) is illegal and can result in penalties.
You can’t dip into SMSF funds to cover personal debts and pay them back later. The fund’s finances must remain separate from personal finances at all times.
Need for Financial and Investment Knowledge
You can hire professionals to assist with your SMSF, but ultimately, you’re responsible for the decisions. That means you’ll need to know your way around investments and risks.
Poor investment choices can hurt your retirement savings, making it crucial to stay informed and proactive in managing the fund’s assets.
For those without experience, the risks of choosing unsuitable investments can outweigh the benefits of greater control.
Trustee Responsibilities and Limitations
As a trustee, you cannot be paid for your role in managing the fund.
However, if you have relevant qualifications, you can be paid for other services provided to the fund.
The SMSF must genuinely require these services, and payment should be at a commercial rate that aligns with the ‘arm’s length’ rule.
It’s important to understand these distinctions.
For example, you can’t pay yourself for general management tasks, but if you’re an accountant or a plumber, you could be paid for services performed for the SMSF.
How to Access Your SMSF in Retirement
When you’re ready to start drawing on your SMSF savings, you must follow several legal steps.
First, you must meet a ‘condition of release,’ such as reaching your preservation age, retiring, or experiencing severe financial hardship. These conditions determine when you can legally withdraw your money. Once you meet a condition, you can choose to take a lump sum or start an allocated pension.
To access your SMSF, you’ll need to meet legal requirements, including providing documentation and recording trustee meeting minutes.
Typically, you’ll need to write a letter as a member to the trustee requesting access to your funds after meeting the conditions.
It’s worth noting that the goal of an SMSF is to ‘spend your last dollar the day before you die.’ This is why life expectancy factors come into play, with required withdrawal percentages increasing as you age, aiming to deplete the fund by the end of your life.
Withdrawal rates depend on factors like age and gender based on life expectancy statistics.
Conclusion
When weighing the pros and cons of self-managed super funds, it’s clear that SMSFs offer unique advantages, like investment control and flexibility.
For business owners, investing in commercial property can be especially appealing.
However, these benefits come with significant responsibilities, including monitoring fund performance and understanding trustee limitations.
An SMSF isn’t the right choice for everyone. Your decision should be based on your circumstances and willingness to take on fund management responsibilities.
Before making a decision, it’s extremely important to seek professional advice.
A qualified accountant can help you understand the full implications of setting up an SMSF, ensure you know all compliance requirements, and guide you in making informed decisions about your retirement savings.
Thinking about setting up an SMSF? Contact MYC Partners today to ensure your retirement planning is on track and discuss if an SMSF is right for you.