The Pros & Cons of Self-Managed Superannuation Funds

Could an SMSF be the right decision for you?

Self-Managed Superannuation Funds (SMSFs) have become increasingly popular among Australians over the years as more people look for ways to take control of their retirement savings.

An SMSF is a type of super fund managed by the members rather than a third-party trustee. While SMSFs offer many benefits, they also come with drawbacks that you must carefully consider.

In this article, we will explore the pros and cons of SMSFs to help you determine whether they are right for you.

Pros of Self-Managed Superannuation Funds

Control over investment decisions

One of the most significant benefits of an SMSF is that members have complete control over the investment decisions made within the fund. This means you can choose investments that align with your personal goals and risk tolerance. You can invest in various assets, including property, shares, and managed funds.

Greater investment choice

Compared to other superannuation funds, SMSFs provide a broader selection of investment alternatives. This means you can invest in assets that may not be available in additional funds, such as direct property investments or unlisted shares.

Tax advantages

SMSFs offer several tax advantages, such as the ability to claim deductions for contributions and franking credits for dividends received from Australian shares. Additionally, SMSFs have a flat tax rate of 15% on investment earnings, which can be advantageous for members in high tax brackets.

Estate planning benefits

SMSFs offer greater estate planning benefits, allowing members to direct their superannuation assets to their preferred beneficiaries. This can be particularly important for members with complex family arrangements, such as blended families or dependents with special needs.

Cost savings

SMSFs can be cost-effective for members with larger balances, as they can save on fees compared to other superannuation funds. This is because the costs associated with running an SMSF are typically fixed, meaning the costs per member decrease as the fund’s balance increases.

Protection from Creditors

Creditors cannot generally access an individual’s super. However, clawback regulations come into effect when an individual intentionally transfers their assets into an SMSF to evade settling their debts to creditors.

Cons of Self-Managed Superannuation Funds

Administrative Responsibility

SMSFs require some administration, including record-keeping, reporting, and compliance obligations. This can be time-consuming and may need members to seek the assistance of professionals, such as accountants or financial advisers.

Responsibility for investment decisions

While having control over investment decisions can be a significant advantage, it also means that members are responsible for ensuring that the investments made are suitable and meet their obligations under superannuation law. This can be particularly challenging for members with limited investment experience or knowledge.

Residency Limitations

Most SMSFs must reside within Australia permanently.

Regulatory and compliance risks

SMSFs are subject to strict regulatory and compliance requirements. Failure to comply can result in penalties or even the loss of the fund’s complying status. This can be particularly challenging for members unfamiliar with superannuation law and regulations.

The SIS Act, or Superannuation Industry (Supervision) Act 1993 (Cth), serves as the governing legislation for SMSFs.

As an SMSF trustee, you may have to engage with two crucial government agencies: the Australian Taxation Office (ATO), which oversees the relevant super laws for SMSFs, and the Australian Securities & Investments Commission (ASIC), which supervises financial services to safeguard consumers and manage SMSF auditor registrations.

Moreover, as a trustee, you must ensure that the fund complies with legislation. These include:

– Adhering to residency requirements.

– Developing an investment strategy.

– Ensuring that all investment decisions align with it.

– Considering member insurance needs.

– Only accepting contributions from fund members.

– Only making super benefit payments to members who have met a condition of release.

It is also your responsibility to monitor total super balance and transfer caps, comply with administration, reporting, and record-keeping requirements, appoint a registered auditor and lodge the fund’s annual return to the ATO while paying tax.

You can manage the above obligations with the help of a financial adviser or accountant. Seeking professional advice will help ensure that these obligations are fully met and that you comply with the law.

Closing Remarks

SMSFs offer a range of benefits for members looking to take control of their super savings. They provide greater investment choice, tax advantages, estate planning benefits, and potential cost savings.

Of course, it’s important to do your due diligence. This includes considering the factors below.

1- The administrative burden.

2- The responsibility of making investment decisions.

3- Regulatory and compliance risks.

Seeking advice and having us guide you through the process is a way to limit the above potential drawbacks, giving you the peace of mind to view SMSFs as potential investment vehicles.

In summary, for those with the financial resources and knowledge to manage the fund effectively, SMSFs can be a viable investment option.

If you are considering this route, an expert in this field can help you assess your options and make an informed decision. With careful planning and management, an SMSF can be a valuable asset for your retirement savings and give you greater control over your financial future

Are you considering a self-managed superannuation fund? Speak to one of our financial experts at Collective Wealth Advisers today. Contact us for a no obligation chat.