Thinking about an SMSF? Here’s what you need to know

Some investors find it satisfying to take a do-it-yourself approach to retirement savings – taking on the responsibility for the growth of their retirement savings in a self-managed superannuation fund (SMSF).

While you have total control over how your retirement funds are invested within the confines of the laws, many factors need to be considered first.

Before taking the plunge, weigh up the risks and rewards by understanding the various super and tax laws, check out the costs involved as well as the level of administration required and start considering your investment strategy.

What you need to know

Setting up an SMSF can be a complex and time-consuming process and there are quite a few regulations and rules that you need to be familiar with before setting up an SMSF. Therefore, seeking professional advice can be beneficial to get your SMSF off on the right foot so it qualifies for the tax concessions available through the super system. We can assist to ensure your SMSF is set up correctly in the first instance to ensure you are eligible for the tax concessions and it is easier to administer.

One of the first decisions is choosing how to structure the fund – either as individual trustees or a corporate trustee.

Funds may have only two to six members (although some states and territories restrict the number of members further).

Once you have your SMSF established, there are ongoing reporting and compliance requirements that need to be adhered to, so it’s important to stay on top of the recordkeeping and administration duties throughout the year to make things easier when it’s time to meet your annual obligations and this can help to avoid non-compliance penalties.

An annual audit will certify that your SMSF has met all its compliance and financial reporting requirements.

The advantages of an SMSF

A SMSF offers several advantages, particularly for individuals who want more control over their retirement savings and investments. Some of the key pros of having an SMSF include:

Investment control

SMSF members have complete control over their investments, you decide where to invest and when assets are disposed. You could also incorporate in property as part of your portfolio.

Estate planning

SMSF members can set up binding death benefit nominations to specify how their superannuation will be distributed after they pass away.

Asset protection

SMSFs can protect members from bankruptcy and litigation, and their superannuation benefits are usually protected from creditors.

Diversification

An SMSF has greater access to investment options and a diversified SMSF portfolio could reduce risk and improve returns over time. Speaking to your accountant or financial adviser can help to ensure you are well-diversified.

Tax advantages

SMSFs have one of the lowest tax rates in Australia. Other tax credits can help to further reduce the tax rate.

Lower costs

Running your own SMSF can have lower ongoing costs, especially for larger funds.

Lump sum payments

SMSF can pay benefits as a lump sum, a pension or a combination if the payment is under the laws and the trust deed.

The disadvantages of an SMSF

While there are several benefits to having an SMSF, there are also some drawbacks and challenges. Here are some of the main things to consider:

Responsibility and learning

Trustees must understand and comply with legal and financial requirements.

Cost

SMSFs can be expensive to set up and maintain, especially for SMSFs with smaller balances.

Time and effort

Running an SMSF requires a significant amount of time, effort, and expertise. Engaging with your accountant or financial adviser for assistance and ongoing support can help to ease the burden.

Risk

SMSFs are not guaranteed by the government, and investment returns are not guaranteed. If you lose money, you won’t have access to the government compensation scheme.

The level of complexity of an SMSF is not to be underestimated.

Is an SMSF right for you?

Setting up an SMSF is worth the time for those who want greater control over their retirement savings, however before you start, you need to consider whether you are comfortable taking on the responsibility of making investment decisions and if you will have the time to manage the ongoing administration tasks associated with it.

Get professional help

Establishing and running an SMSF is not something you can do easily without professional assistance. Many of the legal and regulatory requirements are complex and must be adhered to ensure the fund is compliant. These requirements are also regularly updated or changed so you’ll need to keep an eye on any new obligations.

Even if you and any other members are experienced investors and can manage the fund’s investments without financial advice, you will need help with other areas.

SMSF trustees usually pay for professional assistance to establish their fund. For example, you will need an accountant to help set up your fund’s financial systems and prepare the fund’s annual accounts, returns and operating statements, and you must appoint an approved SMSF auditor for the fund’s annual audit.

Professional assistance is also needed to value the fund’s assets and prepare an actuarial certificate if your SMSF is paying income streams (pensions) to some members.

Many trustees need help with the day-to-day running of the fund and to meet its ongoing reporting and administrative obligations.

And you would need to hire a lawyer to prepare and update the fund’s trust deed.

If you are considering setting up an SMSF, give us a call. We can help you decide whether an SMSF is right for you and assist you with the set-up and administration of the fund if you decide to proceed.

Did you know? 10 interesting facts about SMSFs

$1.02 trillion super assets are currently held in SMSFs

SMSFs have a combined membership of 621,809

More than 1.1 million member accounts are held in SMSFs

Listed shares are the top asset class held by SMSFs (by value)

Cash and term deposits account for 16% of all SMSF assets

85% of SMSF members are 45 years or older

53% of SMSF members are male and 47% are female.

93.2% of SMSFs have two or less members

45% of male and 30% of female SMSF members have an annual income of $100,000 or more

Around 15% of total SMSF assets are held in funds with balances over $10 million

Source: SMSF Super Fund Quarterly Statistical Report – September 2024

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