For some people, the concept of superannuation – a lump of money that you can’t access until you retire and have no control over where it’s invested – doesn’t really sit well.
So a self managed super fund (SMSF for short), which gives you the power to pick what your money is invested in, can sound more appealing.
Self-managed super fund assets represent almost a third (27 per cent) of Australia’s $2.76 trillion superannuation pool. Their average balance ($599,000) is about 11 times the amount of a non-SMSF member’s balance of $56,000, far outstripping the ordinary Aussie.
It sounds attractive. But managing an SMSF isn’t simple.
In fact, it’s a big commitment, involves a lot of responsibility, know-how, paperwork, and risk.
Not only that, but the ‘self-managed’ aspect of an SMSF is a bit of a misnomer: it’s not so much self-managed as it is managed with the help of a small team of accounting, financial services and legal professionals.
There’s also a lot to set up – and a lot to keep in mind.
The upside of an SMSF: You can invest in anything
If you’re not happy with how your super is managed, and if you’re also a knowledgeable investor, an SMSF can make sense.
“An SMSF can invest in anything,” said H&R Block SMSF director Kimberlee Brown.
“It’s also the only superannuation vehicle that can make direct property investments, which makes it especially attractive to small business owners or the self-employed, who can buy a property and run their business from it.
“Artwork and other collectables, physical gold and investments in some unlisted entities are all permitted within an SMSF,” Brown added.
SMSFs also gives you the capacity to adjust your portfolio according to market movements and to changes in your personal circumstances. You can also take advantage of concessional tax rates, income tax exemption and fully franked imputation credits.
You can pool your superannuation with up to three other members in your SMSF, which increases your investment power without increasing on fees.
And thanks to technology as well as greater competition between service providers, having an SMSF is much more cost-effective than it used to be, meaning the old stereotype that only the wealthy have SMSFs can start to shred.
Sounds like a good idea, right?
Setting up an SMSF: Here’s your checklist
This is where it gets sticky. You need to create a trust deed, a legal document that should only be prepared by a legal expert.
Here’s a checklist of things you need to sort out to set up your own self-managed super fund:
- Decide on a trustee structure (corporate or individual), decide on the fund’s members and appoint your trustees
- Make an application to the Australian Taxation Office
- Set up a Tax File Number
- Set up an ABN
- Set up a new bank account
- Decide on an investment strategy
- Outline the investment objectives of the fund
- Specify the investment types
- Outline the procedures for winding up the fund
But it’s not so much the ‘what’ as it is the ‘who’ is involved. Brown strongly recommends you engage the services of a specialist in this field, as well as a financial adviser and a solicitor.
“An SMSF is often referred to as ‘DIY Super’; however, you should engage an SMSF accountant and independent auditor at a minimum to assist you with the compliance and reporting obligations of the fund,” she told Yahoo Finance.
“Ensure they are specialists in the SMSF field because ultimately the trustees are responsible for the fund, so you want to ensure the advice and assistance you receive is accurate.
“It may also be prudent to engage a financial adviser to assist with the investment strategy and related decisions, and a specialist SMSF lawyer in relation to your estate planning with respect to your superannuation.”
Now it becomes clear why only the wealthy used to be bothered with SMSFs.
Setting up an SMSF: Where most people go wrong
1. Thinking you can cash in early.
One of the biggest misconceptions people have is that setting up an SMSF will give them early access to their superannuation.
“There are very limited circumstances under which you can access your super before you meet preservation age (if you were born after 30 June 1964, your preservation age is 60),” Brown said.
“Illegal early access can result in serious penalties, even if you return the super to the fund later.”
2. Not understanding the extent of the paperwork
Handling your own super fund involves a swathe of regulation and compliance that you otherwise wouldn’t need to deal with if you were with a regular super fund. On top of that, extra care has to be taken to ensure that your assets stay very separate to your SMSF’s.
“An SMSF is a separate entity to its members and requires an annual set of financial statements and tax return to be prepared, which also needs to be independently audited,” said Brown.
3. Forgetting insurance
And then there is the issue of insurance. When you move from a regular super fund to an SMSF, your insurance policy doesn’t come with.
“Many people are unaware they have insurance as part of their super, and many don’t think to take up a policy if they roll out to an SMSF.” While you don’t have to have an insurance policy as part of your SMSF, you do have to show you’ve considered it in your investment strategy.
What else do I need to know?
If you’re going to make the decision to manage your own super, you’ve got to do it right – and that means using the best technology to help you stay on top of things.
“Use a specialist SMSF accountant/administrator who offers you real time reporting capabilities to keep on top of contribution caps and to ensure you meet minimum pension drawdowns if the fund is providing an income stream,” Brown advised.
“Thanks to technology, there are now many accounting software products that can receive direct feeds of data from banks and other institutions to allow for real time processing of your super fund’s activities.”
When it comes to insurance, Brown has a few final words of advice: look for an insurance provider that will allow the SMSF to be the policy holder, and its members to be the insured parties.
“Be clear on the timing between the policies finishing and starting as your roll super over so there isn’t a period of time you are uninsured,” she said.
Superannuation tends to be one of those things that remain back-of-mind for most people. And with so much paperwork, time, expertise, and other professionals involved, it may be wise to think good and hard if the returns you get from managing your own fund is worth the effort and the costs involved.
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