Did you know that 53% of SMSF fund members are men and 47% are women? Regular investment into a superannuation fund is essential for retirement planning, no matter your gender.

If you have been considering whether an SMSF (self-managed super fund) might be the right choice for you, this article examines the main advantages and disadvantages of managing your own super fund.

While SMSFs can give you more control over your investments and carry certain tax benefits, the downside is that they require a lot of time, knowledge and risk management. This can take the shine off many of the advantages in certain situations.

Read on to find out what an SMSF is, what the pros and cons of owning one are, and whether an SMSF is a good or bad decision for your situation.

What Is An SMSF?

SMSF is an acronym for a self-managed super fund. As the name suggests, it is a private super fund that you run yourself as the trustee, and to which up to four members can join. Usually, all members are also trustees.

It is the trustee’s responsibility to make sure the SMSF is compliant with all relevant laws and regulations and that the fund is maintained to maximise retirement benefits for all members.

The trustee can be a person or a company and quite often an SMSF only has one member.

Who Has An SMSF?

Most members of SMSFs are over 55. However, one-quarter of all members are now under 50. In this younger age group, interest in an SMSF starts at around age 35.

It’s not surprising that most SMSF members are older. As you will soon learn, running an SMSF can be a time-consuming and involved process, so retirees are often better positioned to have the time to do this.

Additionally, it takes a period of time to build up the balance required to make the costs involved with SMSFs worthwhile. Lower-value fund balances can result in negative returns after expenses and taxes.

The average taxable income of SMSF members is $117,000, however, over 40% have an income of under $40,000. This could be the result of salary sacrificing into the SMSF or being married to a higher-earning spouse who is the trustee of the fund.

Disadvantages Of An SMSF

The main disadvantages of superannuation relate to the time and expertise required to manage the fund. In fact, an SMSF is generally not recommended for anyone who wants a simple solution to their superannuation.

The list below goes through the main disadvantages of an SMSF.

Requires Investment Expertise

If you run your own super fund you are in charge of making the investment decisions. Unlike an industry or retail super fund, this task is not outsourced to an expert investment manager specialised in doing this.

You must create your own investment strategy to ensure that you produce enough returns to last you through your retirement. Many people do not possess the level of expertise or financial know-how needed to do this task adequately. In fact, ASIC found that 33% of fund trustees didn’t know an SMSF had to have an investment strategy.

You must have an understanding of the markets and your investments options. You must also be able to diversify your portfolio to reduce risk and regularly balance your portfolio to maintain your desired risk profile.

Poor investment decisions run the real risk of impacting the assets in your fund, as well as the retirement savings of you and other members of your fund.

You Are Responsible For Compliance

As the trustee of your fund, you will also be responsible for keeping up to date with current legislation and making sure your SMSF is compliant with all regulations.

There are severe penalties for non-compliance which include fines and civil or criminal proceedings. Tax penalties can also be incurred including fund returns being taxed at the top personal marginal income rate rather than the super rate of 15%.

There are also some legal obligations involved with being the trustee of an SMSF like a requirement to set up a trust deed, which is a document that outlines the rules governing your SMSF. While you don’t need extensive legal expertise, the ability to handle legal documents is required.

It will be the responsibility of the trustee to be familiar with all superannuation tax laws. Even if you outsource to a third-party professional such as an accountant or solicitor to help you make decisions in regards to your fund, you are still personally liable for any decisions made.

Involves Time, Administration, and Paperwork

ASIC found that on average, SMSF trustees spend more than 8.4 hours a month managing their fund which works out to be over 100 hours a year cut out from potential family time or pursuing hobbies.

SMSFs are not recommended for those who want a simple superannuation solution.

Those that don’t like admin and paperwork will also have a hard time.

Accurate investment and transaction records must be kept and the process often can be complex involving lots of paperwork and patience. ASIC found that 38% of trustees stated their SMSF was more time-consuming they had anticipated.

Additionally, SMSF regulation is constantly changing. Something that may be true one year may not be true the next.

You will need to make the time commitment to look up and make sure you understand the latest changes to current laws to avoid being fined. As regulations are always evolving, it can be easy to get caught out.

When you think about owning an SMSF, the time and administrative work required to manage it is a real cost to consider.

You Have To Reside In Australia

The majority of SMSF’s fund members must live in Australia on a permanent basis. If you intend to relocate overseas or send through fund contributions while living overseas, this may result in your SMSF becoming non-compliant with the law.

Therefore if you or your fund members intend to move overseas permanently at a future date, this may not be possible.

Complex When Member Relationships Break Down

While one advantage of SMSFs is that they allow multiple family members to combine their supers and be in the same fund, the flipside is that if a separation or divorce happens then untangling each other’s assets can get messy. If the divorce is not amicable, family lawyers and large payments may be needed to resolve it.

Something else to consider is if the more active fund member dies. This can leave an unprepared spouse to deal with the management of the fund and add undue stress to an already difficult situation.

Not Cost-Effective For Low-Value Balances

As many SMSF management costs are fixed, it becomes disadvantageous if the value of funds in the SMSF is low.

These fixed costs may include a set-up fee, an annual SMSF supervisory fee, tax return and audits, costs for an annual financial statement, ongoing admin costs, annual actuarial certificate fee, insurance premiums, professional investment fees, and eventually, wind-up fees.

BGL, an SMSF administration software provider, analysed more than 190,000 SMSFs on its database. It found that the average annual cost of running SMSF was $5,720 with a median cost of $3,718.

The result is that low balance SMSFs are expensive to run. In a 2019 study, ASIC found that balances below $500,000 produced lower than average returns compared to industry and retail super funds after expense and tax. The most shocking finding is that the average returns of SMSF funds below $200,000, after expense and tax, was negative.

On the other hand, funds with balances above $500,000, on average, earned returns that were competitive with industry and retail super funds after expenses and tax.

The consensus is that to make the costs of running your own super fund worthwhile, you will need to have a substantial balance invested of at least $200,000.

Estate Planning Required

If you pass away, the benefits of your SMSF do not automatically fall into your estate. You will need to provide written direction, or the allocation of benefits may fall to the other trustees.

ASIC found that 30% of members had no arrangements in place should something happen to them. This is a big mistake as your superannuation funds may not end up where you want them to after your passing.

To properly document where your benefits will go, you will need to create a legal document called a binding death nomination or a death benefit agreement. The binding death nomination must be renewed every 3 years unless it is a non-lapsing nomination.

Advantages of an SMSF

The main advantages of SMSFs include tax benefits, having more control over what you invest in, and being able to share a super fund with family members.

The below list goes through the main advantages of an SMSF in more detail.

You’re In Complete Control Of Your Investments

If you have the necessary investment expertise and the time to spare, an SMSF allows you to be in the driver’s seat and choose exactly how your money is invested.

Ethical investing may also be a consideration, where you can choose to invest in industries that align with your values and beliefs. You may want to divest from tobacco or gambling industries and instead, invest in sustainable resources or healthcare. At Crescent Wealth, we only invest your super according to Islamic investment principles.

With an SMSF, you also have the freedom to act quickly and jump on new investment opportunities or adjust your asset allocation in reaction to market events. Bigger super funds on the other hand may be slower to react to sudden changes.

Some people may also derive a sense of satisfaction from the hands-on running of their own fund. They may also thrive on the challenge of making big decisions and ‘beating the market’ to watch their investments grow.

Family And Friends Can Join Your SMSF

If you have an SMSF, you can have up to 4 members join your fund. This is generally with family members but you also set up an SMSF with friends.

Bringing four people’s money together means greater scale. You can invest in opportunities that you may not have been able to afford individually and share the costs to run the fund. Couples can also benefit from the tax advantages of combining their super, especially as they enter retirement and start drawing down income.

However, beware that if there is a relationship rupture or someone wants to leave the fund, this could become a complicated and expensive process to resolve to every party’s satisfaction.

Allows Investment In Property

Unlike in an industry or retail superannuation fund, you can buy property directly through your SMSF. This means you can earn rental income as well as receive capital gains from any growth in your property’s value. You can choose exactly which property you want to purchase, including your own business premises, and select who you want to rent it to.

Allows Investment In Non-Traditional Assets

SMSFs can also invest in items that you normally can’t invest in with a regular super fund. This includes physical gold, artworks, stamps, coins, jewellery, antiques, wine, and cryptocurrencies. There are, however, stringent rules around holding these assets in an SMSF, which you will need to become aware of.

Tax Benefits

SMSFs enjoy the same tax concessions as standard super funds. Fund returns are taxed at a maximum of 15%. If you consider that the marginal tax rate for income can be as high as 45%, this is a significant tax saving.

SMSFs can also be used for tax strategies around capital gains and franking credits. If an SMSF has multiple members, income can be allocated from non-retired members to retired members to take advantage of additional tax benefits.

Is an SMSF Right For You?

SMSFs are not for everyone. They can offer benefits if you enjoy taking responsibility for your investments and have the time and knowledge to create an investment strategy.

However, the downside is that if you don’t have this expertise, it can become a risky and costly avenue to take.

If you’d like to save yourself the time, costs, and potential headache of running your own SMSF, a managed super fund may be your best choice. Contact Crescent Wealth to explore how we can help.

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Islamic Money Expert

Fatma currently leads Crescent Wealth’s Operations, including strategic business planning, project management of major projects and management of key stakeholders.

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