Do you need a Self-Managed Superannuation Fund (SMSF) …or do you just WANT one?

SMSFs are a boom industry in Australia. There are around 600,000 of them operating and well over a million members involved in them.

So, are they a good idea?

Fran looked at the pros and cons to help you learn more about SMSFs in 2019. We’ve revised the article for you here:

Benefits of having an SMSF

There are four reasons a Self-Managed Superannuation Fund can be beneficial:

1. Control

That SMSF is OURS and no-one is going to care about it as much as we do. We could do better than the faceless minions toiling away in the cubicles of the business and banking world, right? We’re financially savvy and every investment decision we’ve ever made has been great, right?

Well, maybe not but it’s our money and if we’re in control of it we’ll know exactly where it is and what it is doing.

We get to choose the assets we buy, not just selecting “balanced” in the offered fund alternatives.

2. Reducing fees

If you’ve got a few dollars in superannuation and the fund managers are pocketing 2 per cent every year to manage it for you, it can look appealing to take over.

This would mean replacing management and the ‘variable balance-based fees’ with ‘set fees’ for only doing the required tax reports and audits.

There is a bit of a tipping point where this makes sense. As a rule of thumb, the theory goes if you’re paying fees above $4,000 (2 per cent of $200,000 being $4,000) you might see an advantage in having an SMSF where the annual fees could be well be under $3,000.

3. Keeping it in the family

An SMSF can be a good option for family units. They can become like a family business and build towards common goals shared by family members.

4. Loans

You can now use your SMSF for asset loans. This has opened the door for investing in real estate even if your fund doesn’t have enough to pay for the asset in cash. However, it’s important to note there are strict guidelines to follow.

Challenges of having an SMSF

There are six reasons a Self-Managed Superannuation Fund might not be beneficial:

1. Have you got the time?

There is a significant amount of time required for managing the fund and doing administrative tasks. A third of people quizzed about this aspect said it took much more time than anticipated.

The time required will depend on how active the management needs to be. You’ll need to watch the investments and discuss strategies with other members.

You’ll also need to liaise with professionals involved in managing the SMSF such as accountants, property managers and bankers.

2. Performance is key

To justify the cost, time, and effort required, your SMSF will need to out perform industry standards. The net earnings should be level or above industry offerings to justify the effort.

Keep in mind you’ll be competing with trained and experienced investors. It is important for members to discuss whether the effort is worth the reward.

3. Keeping it in the family

We all know family and business can be a difficult mix. Conflicting views on investment strategy, relationship breakdowns, and uneven commitment.

For example, if one members feels they contribute more than another, they could feel disadvantaged. These can all have a flow-on effect interfering with the performance of the SMSF.

4. Insurances

Commercial or industry funds can offer well priced group policies. Unfortunately, in an SMSF you won’t have access to these and would need to organise your own insurance.

5. They keep changing The Rules!

Superannuation is a pot of gold that the government is trying to tap into by changing taxation rules. The Government have set new limits on how big a fund can be to remain on lower tax rates.

The recent threat of removing refunds for input tax credits has been allayed for now, but would also have an affect on SMSFs had it been implemented. Making long term plans when the rule framework is uncertain can create work. It means keeping up with changes that may impact your decisions down the track. It’s important to include this in your regular maintenance.

6. Liability

The trustees of the SMSF will be responsible for actions taken by your SMSF. It is important to follow the guidelines you’ve had written into the Trust Deed when the fund is set up. There are strict laws and taxation rules, and ignorance is no defence if they’re broken.

As you can see, there is a lot to think about if you’re considering a Self-Managed Superannuation Fund.

Before steaming ahead, talk about these points with the people you’re going into an SMSF with, and get some professional advice. It’s important to have good communication and understanding about these topics before proceeding.

If you’re re-thinking the idea of an SMSF, there are alternatives to explore. Consider the ‘do-it-yourself’ style of fund offered by some Superannuation Providers. These allow you to make detailed choices about your investments.

Here’s some excellent general information on Money Smart’s website if you want to explore further.

Editor’s note: this article was originally published on the Money School blog in July 2019 and has been refreshed in August 2024.

We’re slowly migrating the blog across to Beehiiv, which means we’re losing the comments on the original Wordpress blog.

Sorry to those who asked questions or made comments, you’re welcome to re-add them here.

Please also note that this article was originally written by Money School co-founder, Fran White. She was an accountant and used an SMSF, so this article reflects both her professional and personal experience. Sadly Fran passed away in September 2020. We are republishing her excellent articles in her memory.

About Money School

If you’re new here, welcome! Delighted to have you 😁

This is the blog for Money School, an Australian financial education company.

The main site is at https://www.moneyschool.org.au, but I keep our articles over here on beehiiv.

Everything on the main site and this blog is for educational purposes only. I’m not a financial adviser, nor do I play one on Netflix. I aim to help you learn about money so you can ‘choose your own adventure’.

Money School was co-founded in 2010 by me (Lacey Filipich) and my mother, Fran White. Money School offers workshops, online courses and has an international award-winning book, published with Penguin Life in 2020.

I’m also a regular media commentator on all things personal finance. If you’ve got 16 minutes to spare, you might like to check out my TEDx talk (over 1m views!) on financial independence and mini-retirements.