SMSF - Pros and Cons of Managing One
Managing an SMSF is something more, and more Australians are opting in for. In fact, according to the ATO, the number of SMSFs has been growing at almost 6% annually from 2012 – 2016. However, it’s important to note that a self-managed super fund may not be for everyone.
While an SMSF can be a great way to grow your nuts for retirement, it can also be risky, time-consuming and costly. That’s why it’s important to be aware of the responsibilities and risks of managing an SMSF first. In this blog, we’ll go through the pros and cons of managing your super-fund. Please remember, Squirrel does not provide this information from an advisory point of view. If you have questions about whether an SMSF is right for you, please speak to an expert financial adviser.
Check out our complete SMSF guide.
What Is A Self-Managed Super Fund?
SMSFs are a private superannuation fund that you manage yourself. It can have up to 4 members, all of who must be directors or trustees. The members are responsible for all decisions of the fund and compliance with the relevant laws. The Australian Taxation Office regulates SMSFs. SMSFs operate under the same regulations as retail super funds, with you taking a much more active role towards your retirement savings.
What Are The Requirements For Setting Up A SMSF?
The money is for the sole purpose of retirement and you must:
- Keep comprehensive records and submit to an SMSF approved auditor
- Have the financial skills to make the required appropriate decisions
- Follow an investment path with acceptable risk tolerances
- Be ready to play the role of a trustee with the responsibility of making decisions that have legal implications
- Be ready to spend time researching investment opportunities
- Consider insurance including life cover, income protection and disability cover for the fund members
The Pros of Managing an SMSF
Total Financial Control
With a self-managed super fund, no fund manager is going wild with your money. You (and any other SMSF trustees) have complete control over the fund. This means you are in charge of your super and what it invests in. This is a huge advantage to those who have certain assets they’d like to invest in – such as property or collectibles. Even if you don’t have a certain investment asset in mind, an SMSF may be advantageous to you if you’re looking to start taking control of your super.
The members of an SMSF have complete control over their fund. This means that they decide the investment path the fund will take. This can be crucial when deciding to take advantage of new opportunities that otherwise seem risky for ordinary super funds. You can decide to invest in a wide range of assets including securities, managed funds, fixed interest investments, residential and commercial property, to name a few.
More Freedom to Invest
Having full financial control of your super means, you will have more freedom to choose your investment assets. With an SMSF, you and any other members can choose from a variety of assets to invest in. This can be anything from residential property, commercial property for your business, gold and silver, cash term deposits, Australian and International shares, and even cryptocurrencies. As long as your investment asset passes the sole-purpose test, and your SMSF stays compliant with the ATO, you will have much more flexibility in your investment choices.
Borrow money with your SMSF
While people have been using Self-Managed Super Funds to purchase investment properties for a long time, the difference now is that you can use your SMSF to borrow the money you need to do so. Investments in property fluctuate less than in shares, giving you more control. Though buying outright is far less complex, the option to secure a mortgage means more people can invest in property through SMSF.
Save on Fees
With a Squirrel SMSF, you can potentially save thousands of dollars in fees over your lifetime. This is because instead of paying a percentage of your super to a fund manager as you would in an industry fund, we have a flat-rate admin and setup fee. This means, as your super balance increases, your fee does not. As a result, the larger balance you have in your super, the more you can save in fees by switching to a self-managed super fund.
Lower Costs For Bigger Funds
Running your SMSF can provide the benefit of lower ongoing costs. The estimated operating expense ratio on SMF is at 0.5 percent. However, the ATO explains that the bigger the fund, the lower the operating cost ratio.
Quicker Decision Making
Making quick decisions can make a lot of difference in the performance of a fund. Decisions can be made quickly to invest in profitable trends, and equally made to get out of losing trends.
When you’re managing an SMSF, you have the opportunity to take advantage of certain super tax benefits. For example, super is taxed at 15% income tax, and 0$ GST (in retirement). So your SMSF investments assets, such as property, can enjoy a nice tax break on the income they generate for your retirement!
Here is a quick summary:
- The SMSF owner won’t need to pay capital gains tax once they’ve retired.
- Unlike your personal tax rate, which can be as high as 46%, you’ll pay a maximum tax rate of only 15% on rental income after expenses and any capital gains on the disposal of property.
- Providing the members of the super fund pay money through salary sacrifice, you may be eligible for tax-deductible loan repayments.
- Investment-related insurance and property depreciation are both tax deductible.
- Claim further tax deductions on many – if not all – costs related to the purchase, management, and sale of the property.
Consolidate Super with Family
With an SMSF, you can consolidate your super with up to three other members – such as a partner, spouse or another family member. This allows you to create a larger total balance, opening your super up to new investments opportunities! If you choose a Squirrel SMSF, you’ll also save on fees as our SMSF setup, and admin costs are per fund, not per person.
Diversify your investment assets
Your investment property or properties are not recommended to be 100% of your super fund. Diversifying your assets can strengthen your super fund and generate less risk, so this is just another way to spread your asset portfolio across different investment sectors.
Live in the investment property once you retire*
While you are working, the property is in the name of the fund, and not yourself. However, when you’re retired, and you’ve started receiving your super payments, you can sell your property, and use that money to buy your investment property from your super fund. Then sit back and enjoy your twilight years in your dream property!
The Cons of Managing an SMSF
Researching suitable investment paths takes a lot of time. Running the SMSF is a continuously engaging affair since you must keep tabs on your investment’s performance.
Managing an SMSF can be very time-consuming. As an SMSF member, you are responsible for researching to find suitable investment assets for your retirement strategy. It is also your responsibility to manage the performance of your investments.
Of course, different assets require different levels of attention and time. For example, property investment will be very time-consuming in the beginning, as you’re buying the property and securing tenants. But once you start generating a passive income from your property, you should hopefully have minimal day-to-day involvement with it unless something goes wrong. On the flip side, forex trading or cryptocurrency investments will require a lot more attention regularly, as you won’t want to miss key trades. It’s important to be educated and prepared for the time required for each investment asset.
Investment Knowledge Required
For SMSF members without a background in finance and tax, setting up and managing an SMSF can be quite a challenge. Poor decision making could lead to financial and legal consequences, especially in matters of taxation.
If you don’t have adequate investment knowledge or time to operate your fund, managing an SMSF can be risky. That’s why it’s important to conduct thorough research on all investment assets within your strategy to fully comprehend the risks involved. It’s also wise to speak to a financial adviser before investing in anything.
Additional Costs to Consider
Managing an SMSF can incur additional costs beyond the setup and admin fees. In many SMSFs, accounting and auditing services are extra costs. However, with a Squirrel SMSF, these services are included in our flat-rate admin fee so you won’t get any nasty surprises.
There may be however additional costs to consider for each investment type. For example, property investments will incur legal fees and stamp duties. Depending on which platform you trade forex or shares on, your SMSF may also incur buy/sell fees.
Something to be aware of is that if your SMSF is not compliant with the ATO’s laws and regulations, then you could face costly legal fees and penalties.
It’s important to ensure your SMSF will have a balance large enough to maintain its viability as additional costs can have an impact on your balance and retirement goals.
Not Eligible for Government Compensation Schemes
SMSFs cannot access government compensation schemes in case money is lost for various reasons including those outside the control of the trustees. SMSF is not eligible for compensation under superannuation laws if they suffer loss as a result of fraud or theft. That’s why it’s important to consider purchasing insurance coverage for your SMSF and its investments. This way your super balance and retirement goals can be protected.
Subject to Compliance-Based Regulations by the ATO
The ATO regulates SMSFs andrequires regular compliance. As a result, SMSF members are responsible for making sure their SMSF is up to date with the laws and regulations. SMSF members who fail to comply with the ATO’s laws will face costly legal and financial penalties. This could deplete much of their retirement savings and even result in civil or criminal sanctions.
As part of Squirrel’s fixed administrative fee, you will receive annual compliance of your SMSF. You will also receive unlimited customer service, so if your SMSF is ever be audited by the ATO, the experts at Squirrel will work with you every step of the way.
It’s important to note that choosing to manage your super can be a big decision. While there are many benefits, there are also many responsibilities and costs to consider. And it can get even more time-consuming and risky depending on your investments
Reduced Access To Dispute Resolution Bodies
SMSFs have limited access to dispute resolution bodies meaning that the fund is at risk of damaging consequences if the directors/trustees are not able to access competent legal aid. Resolving disputes through conventional courts imply higher costs for an SMSF.
Property Investment Type and Usage Restrictions
Your SMSF can only be used to buy either an investment or commercial property. It cannot be used to buy yourself or a family member a property, including for personal rental purposes – it must be rented out to tenants outside of your family, so cannot be used to benefit you or your family before retirement.
Property can be complex to sell if using your SMSF to purchase it
Though shares are likely to fluctuate more than property investments, the property takes far longer to sell than shares do, and selling can cost a fair bit too. You might also be stung by the housing market when you want to sell – the value of the property may not have risen.
Cost of purchasing, maintaining and selling an investment property when using your SMSF
While an investment property should provide you with a steady monthly income, you may go some time without a tenant. Purchasing a property can result in heavy fees such as stamp duty, and when it’s time to sell, these fees apply again. You’ll also be responsible for maintaining the property over the lifetime of the investment, which will also deduct money from your super fund. Though you can borrow to purchase the property, you cannot borrow to do it up, so you must ensure you have sufficient funds to use as and when needed.
On a side note - The Importance Of Ongoing Financial Advice
It is crucial that SMSF access sound financial advice. It is highly recommended that you seek the services of a financial planner before deciding to set one up. The advisor will outline the risks involved in running an SMSF. After setting up an SMSF, a financial planner can assist in the administration investment decision of the fund. However, it is important to note that a financial advisor only makes recommendations and the responsibility of executing those rests on the trustees.
Using a Certified Financial Planner (CFP) is important. Using a CFP is strongly advised for several reasons:
Better Quality Investment Research
A financial advisor can help identify investment opportunities that SMSF members are overlooking. The advisor can also help filter through several investment choices for the one that is suitable based on your goals and objectives.
Avoiding Financial And Legal Pitfalls
For SMSF members without adequate financial and legal skills, a financial advisor helps to minimise risks. The advisor can make recommendations on things like taxation, membership, financial compliance and so on.
Easier Day To Day Administration
It is possible to delegate authority to a financial advisor to make transactions on your behalf. This can relieve the SMSF members from the pressure of day to day management tasks and keep tabs on various investments.
The decision to put your superannuation into an SMSF is not one which should be taken lightly. You should seek advice from a Certified Financial Planner. With their help, you can weigh up the pros and cons of SMSFs and work out if starting one would suit your needs.