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 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.
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. 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.
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 6 members join the fund. These can be family members, which means you can manage your collective super balance together as a family.
| Response | 75+ yrs | 65-74 yrs | 55-64 yrs | 45-54 yrs | 35-44 yrs | 25-34 yrs | 18-24 yrs |
|---|---|---|---|---|---|---|---|
| No | 85.71% | 76.83% | 76.25% | 70.18% | 56.59% | 46.67% | 48.35% |
| Yes | 14.29% | 23.17% | 23.75% | 29.82% | 43.41% | 53.33% | 51.65% |
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.
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.
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.
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.
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.
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).
ESUPERFUND can help you set up your own SMSF. This review takes you through what you need to know to decide if it's right for you.
Learn the responsibilities and obligations of SMSF individual and corporate trustees, including the trustee declaration requirements.
Compare SMSF bank accounts in Australia to manage your self-managed super fund’s expenses, place trades, accept member contributions and earn investment income.
An SMSF service can help you establish your self-managed super fund, and assist with ongoing admin and management of the fund. Here are the pros and cons.
Learn how to roll over your super into your SMSF and make contributions into the fund.
How much does it cost to set up and run an SMSF? How large does your balance need to be for an SMSF to be cost-effective? Find out here.
SMSF term deposits offer a secure and steady way to boost your retirement balance, so here’s what you need to do to open an account.
Learn how to develop a strong SMSF investment strategy and what assets you can and can't invest in. Want an SMSF investment property? There's a few things to consider first.