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Are you considering starting your own self managed super fund (SMSF)? Managing your super yourself might seem like a good idea on the surface, but SMSFs aren't right for everyone.
We'll take you through the major benefits of SMSFs as well as what risks to consider, so you can decide if an SMSF is right for you.
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A standard super fund, such as a retail or industry fund, will have investment managers that 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.
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.
One of the main benefits of an SMSF is having complete control over your super, but there are other benefits too.
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 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.
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. For example, you can 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.
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.
One benefit of starting an SMSF is that you can have up to four members join the fund. These can be family members, which means you can manage your collective super balance together as a family.
SMSFs also come with a number of risks. It's a good idea to make sure you understand what these are and how to avoid them before setting up your SMSF.
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.
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.
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 being a lot more expensive to manage compared to the fees you'd pay in a standard super fund. There are set-up fees, annual reporting and auditing fees as well as ongoing admin and investment management fees to think about. Plus, if you decide to pay for professional investment advice and planning, you'll be paying even more. Read more about SMSF costs in our guide here.
If you've read this guide and believe an SMSF is right for you, take a look at our simple six-step guide on setting up an SMSF.
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