Self Managed Super Fund Advantages and Disadvantages
The Australian super industry is a $2 trillion industry consisting of different funds that manage assets running into billions of dollars on behalf of millions of investors. Those seeking more control and flexibility can setup a Self Managed Super Fund for implementing a personalized investment strategy.
A SMSF must have between one to four members and all members must be trustees of the Fund. The trust can have individual or corporate trustees.
In the case of the latter, the member of the SMSF must be a director of the corporate organization. A single member Self-Managed Super Fund will have the sole member as one trustee along with another person to comply with the rule of minimum two trustees for a SMSF.
- Flexible Investment Strategy
Conventional investment funds cater to the retirement needs of millions of members. In case of a SMSF, the investment strategy can be tweaked to suit your individual preferences. From investing in real estate and the stock market, to including art collectibles and commercial properties in your asset portfolio.
Members enjoy more freedom to plan for their retirement.
- Consolidated Tax, Retirement & Estate Planning
A Self-Managed Super Fund can be setup to plan for intergenerational wealth transfer, with the ability to transfer wealth tax effectively and specifically to your beneficiaries.
Your asset mix and investment strategy can be fine-tuned for maximum tax saving. Combined with franked dividends, tax deductions on contributions, and taxation of the fund’s income at 15%, the members can save a lot on their tax liability. This fund can be used for smooth devolution of assets amongst heirs without any legal or estate-tax complications.
- Reduced Administration Costs
Many retail and industry super funds still have annual account keeping fees, expense recovery fees, administration fees, as well as investment fees.
For larger account balances, these fees can soon add up and often they are linked to the total balance. This means that as your account balance grows, the actual fee paid increases.
With a SMSF, the only fees that are based upon your account balance tend to be those paid to fund managers if you choose to use them. Of course, implementing a SMSF with a low account balance can have a huge impact upon your overall returns, as the dollar based fees can comprise a large percentage of your account balance. We recommend that you speak to an adviser about this prior to implementation.
- Setup Costs and Ongoing Expenses
Recently, costs for setting up and operating a SMSF have been reducing. But it can still be costly for members with small balances to consider setting up a SMSF.
Not only will there be costs for the set-up of the SMSF, but there may be other costs involved such as strategic investment advice, corporate trustees to set up, bare trusts to organise and it is also a requirement that trustees consider the need for life insurance and disability insurance for their members.
You should plan for ongoing costs related to fund management, maintenance of accounts, and the annual audit.
- Trustee Responsibilities
Setting up and running a Self-Managed Super Fund can be complex, and not without risk. The trustees bear ultimate responsibility for compliance with all legal requirements. This makes the SMSF a risky proposition, especially for those without the requisite technical and financial expertise. The fact that even inadvertent non-compliance may lead to penalties can make administration a time-consuming and onerous responsibility for the trustees.
The trustee performs a very important role in the functioning of the fund. The duties of trustees include:
- Implementing the investment strategy including outsourcing certain responsibilities to professional fund administrators, accountants, actuaries, and auditors.
- Ensuring compliance with all rules and restrictions related to acquisition of assets, borrowings, management of in-house assets, contributions, lending to members, and payment of benefits.
- Fulfilment of all administrative responsibilities related to record keeping, accounting and tax returns, and annual audits.
- Risk of Investment Losses
As with any investment, there is always an element of risk. However, the Global Financial Crisis of 2008 saw many SMSF trustees transfer all or most of their holdings into instruments such as Term Deposits when the market was at its low point. The risk of investment loss was too great for the trustees, yet many more were paralyzed with indecision when it came to re-entering the market.
Having a financial adviser at your side will help you make sense of what is happening, and make sensible choices when investing your money over the long term.