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What are the benefits of SMSFs (and the risks)?

An SMSF gives you a lot more control over your super, and allows you to invest in things like residential property. However, while there are benefits to an SMSF there are some downsides too.

Self-managed super funds (SMSFs) are different to industry and retail funds and are exactly what the name suggests; they are a super fund that you manage yourself.

You are responsible for contributing to the fund and also in control of the investments and insurance. There are benefits to SMSFs but also a few risks and drawbacks that are important to understand before you set one up. We'll go through all of these in this guide.

A few points to know about SMSFs

  • Unlike a standard industry or retail fund, an SMSF gives you complete control over how your super is invested
  • You can invest in residential property, crypto, individual shares and other rare asset classes like antiques, art and collectibles and also act on investment decisions quickly
  • Managing an SMSF can be expensive, and there are serious penalties if your fund breaches one of the requirements
  • Managing your own super can be time-consuming; there's a lot of administration involved

What are the benefits of an SMSF?

You have control over how your funds are invested

A standard super fund, such as a retail or industry fund, will have investment managers who decide where and how your super is invested on your behalf with little or no input from you. This is why SMSFs are a popular choice for thousands of Australians; an SMSF gives you complete control over how your super is invested.

SMSFs come with tax benefits

Like retail and industry super funds, SMSF income is taxed at the lower tax rate of 15%. Considering your marginal tax rate for any income you earn through work could be as high as 45%, this is significantly lower.

You can buy direct residential property

You can buy an investment property through your SMSF and earn income from the rental payments while also enjoying the capital gain of the property value. You have complete control over the property you choose to buy and who you rent it to (however, you can't rent it to direct family members as this is a conflict). With a standard super fund, this isn't possible.

You can invest in rare, less popular asset classes

Not only do you have complete control over your investments, but you can also choose to invest in things that you generally can't invest in with a regular super fund. Yes, you can invest in the usual things such as shares or an SMSF term deposit. But you can also invest in art, antiques or collectables like stamps and coins. You can also buy physical gold, which isn't possible with a regular super fund.

You can act on investment decisions quickly

Another advantage of managing your own investments is the freedom to act quickly to jump on investment opportunities. You can instantly adjust your asset allocation if market conditions change, while big super funds will be much slower to act.

Your SMSF can include family members

One benefit of starting an SMSF is that you can have up to 6 members join the fund. These can be family members, which means you can manage your collective super balance together as a family.

Finder survey: Would Australians of different ages consider setting up a self managed super fund?

Response75+ yrs65-74 yrs55-64 yrs45-54 yrs35-44 yrs25-34 yrs18-24 yrs
Source: Finder survey by Pure Profile of 1004 Australians, December 2023

What are the drawbacks of SMSFs?

Heavy fines apply if your SMSF doesn't comply with the law

SMSFs must follow the super laws as set by the ATO, and if your fund breaches one of these laws, you could be hit with a hefty fine. For example, if you rented out your SMSF's investment property to a family member for cheaper rent and were caught out, you'd be fined. Read more about your responsibilities as the trustee of your own SMSF here.

Investing on your own can be risky

All investments come with some level of risk. However, the more investment experience you have, the better you'll be at managing this risk. You need to be confident in your ability to create and manage your SMSF investment strategy. If you're not, you might be better off sticking with a regular super fund that manages these investments on your behalf.

SMSF regulation is constantly changing

You might understand all the regulations and policies concerning SMSFs now, but these laws are constantly being tweaked. Something that was okay the previous year might not be okay the next; you need to stay up-to-date with the regulation each year to avoid being fined. Because these regulations are constantly evolving, it can be easy to get caught out.

An SMSF could end up costing you more

Generally, you need a balance of $200,000 or more for an SMSF to be cost-effective. There are set-up fees, annual reporting and auditing fees as well as ongoing admin and investment management fees to think about, so an SMSF could end up being more expensive compared to a standard super fund. Plus, if you decide to pay for professional investment advice and planning, you'll be paying even more.

SMSFs are complicated and time-consuming to manage

Trustees need to have sufficient knowledge of tax and super laws so that their SMSF is compliant. If there is a breach, the trustee can personally be fined. Because of the regulation, tax and other requirements, managing an SMSF is very time-consuming.

SMSF vs a retail or industry super fund

The main difference between an SMSF and other super funds is that you're managing the fund and making investment decisions yourself, which is appealing to some people. With retail funds and industry super funds, a fund manager looks after the fund and makes these decisions on your behalf (the fund manager acts as the trustee of your fund, not you). Therefore, you may not even know where your own money is being invested.

Another major advantage of an SMSF is you could choose to buy an investment property through your fund, which isn't an option if you've got your super in a standard super fund. This is appealing as it's a good way to get into the residential property market, compared to a lot of major super funds which mainly invest in commercial property and infrastructure.

However, it's important to remember that you would also have more legal responsibilities and admin duties.

An SMSF might be the right choice for you, if:

  • You have a large super balance. There are many costs involved with setting up and managing an SMSF, and you generally need a balance over $200,000 for SMSFs to be cost-effective compared to a standard super fund. This isn't a set rule, but it's a good guideline to consider. You can read more about the costs involved with setting up an SMSF here.
  • You understand how investments work. You'll be responsible for setting your SMSF investment strategy, so you'll need to understand how the share market works, how to buy and manage an investment property and how to invest in international markets. If you've never invested in anything before, an SMSF is probably not for you.
  • You have enough time to manage the fund. Managing an SMSF can be quite time-intensive, so you'll need to make sure your lifestyle allows you enough free time to properly manage the fund. If you don't have enough time to dedicate to the SMSF, your investments might suffer as a result, and you might miss some of your reporting deadlines with the ATO.
  • You have some legal expertise. Being the trustee of an SMSF comes with a number of legal obligations, for example setting up the trust deed (this is a legal document that outlines the rules of the SMSF). While it's not necessary to have extensive legal experience, some understanding of how to manage legal documents will be helpful when setting up an SMSF.

If you've answered no to several of the above points, a super fund that is managed for you might be a better fit rather than an SMSF. You can compare super funds in our guide here. If you've answered yes to most of the above points, an SMSF could be a good choice for you. Read on to learn more about the pros and cons of an SMSF.

How to get the most out of your SMSF

Set it up well from the beginning. A good SMSF starts with a good foundation. You need an accountant, legal support and investment advice from professionals. If you believe an SMSF is right for you, take a look at our simple six-step guide on setting up an SMSF.

Don't be afraid to outsource tasks. If you're a bit unsure on some of the legalities, tax rules or admin tasks seek professional support. Otherwise, you could risk a fine from the ATO if your SMSF isn't compliant. There are SMSF administration services available to help you set up and manage your fund's admin.

Have a clear investment strategy. You should have a well-planned, clear and documented SMSF investment strategy in place before you start investing with your fund. Having a documented strategy will help you stick to your plan in times of market volatility (plus it's also a legal requirement).

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