Self managed super funds are the fastest growing sector of the Australian superannution industry, but should you jump on the SMSF bandwagon?
There are numerous benefits which make an SMSF an attractive option for Australians, however there are also some important factors that need to be considered before making the switch.
Before we look at the pros and cons of establishing an SMSF, it is important to understand exactly what an SMSF is.
What is an SMSF?
SMSF stands for Self Managed Superannuation Fund. Most Australians have their retirement savings held with an industry or retail super fund, however an SMSF allows you to take control of your retirement savings yourself.
An SMSF allows you to invest in a wider range of investments, including many which are not available through traditional funds, such as direct property investment.
The same rules apply to SMSFs when it comes to how much you can contribute and when you can withdraw your funds, however you do have more control over other aspects of your fund such as the investment strategy.
Benefits of an SMSF
There are two primary benefits to holding your retirement savings through an SMSF. These include the greater freedom in investment choices, and the potential for reduced fees on larger super balances.
Whilst traditional super funds are improving their investment options and flexibility, they still fall a long way short of the flexibility offered by an SMSF.
An SMSF allows you to invest in a range of assets including direct property and shares, and in some cases even collectibles. You also have control over the timing of asset acquisitions and disposals, which gives you more control over the Capital Gains Tax (CGT) outcomes for your fund.
When it comes to ongoing fees and charges an SMSF has the potential to save money due to the fact that they often attract fixed administration fees regardless of the balance, whilst many traditional funds attract fees on a percentage basis.
On a small sized super balance this will generally work against an SMSF, however once your balance reaches a certain size there are savings to be had by going down the SMSF path over a traditional fund.
Downsides to an SMSF
Whilst there are plenty of benefits to having an SMSF, there are also a number of important factors to be considered which have the potential for downside.
It is true that an SMSF gives you more control, but with greater control comes greater responsibility. With a standard super fund you can leave it alone for years without worrying too much, but with an SMSF you must constantly monitor the fund and keep on top of compliance issues.
An SMSF must lodge a tax return with the Australian Taxation Office (ATO) each year, and must also undergo a compliance audit by a qualified and approved person.
It is also important to manage your investments, contributions and withdrawals carefully, as any mistakes can lead to serious penalties which can have a major impact on you and your SMSF.
If you are planning on managing your investments yourself rather than relying on a financial planner for advice and direction, it is important to have a good understanding of how investment markets work.
It can be easy for an unexperienced investor to lose a large portion of their super balance due to poor investment decisions, especially if this is the first time they have had a large lump sum to invest.
Is an SMSF Right for You?
Whether or not an SMSF is right for you really depends on your own situation. Factors influencing the answer can include the size of your super balance, your experience and knowledge of investment markets and your ability to devote time towards managing your fund.
If you believe that you have what it takes to make an SMSF work for you, it can certainly be a rewarding way to manage and boost your retirement savings.