So what exactly is an SMSF?
As the name suggests, SMSFs are basically superannuation funds that you run and manage yourself.
SMSFs are different from the mainstream super funds that you would have seen advertised and may already be a member of through your work or industry association. Mainstream funds – often classified as either industry, corporate, public sector or retail funds depending on their membership profiles – pool the investments of large numbers of members together (hundreds if not thousands of individuals) and take full responsibility for investing and administering these funds collectively on behalf of their members.
In contrast, SMSFs are private super funds where the members themselves (who are usually closely related) are responsible for investing and administering their own retirement savings. SMSFs are also regulated differently, being overseen by the ATO whereas mainstream funds are regulated by the Australian Prudential Authority (APRA).
SMSFs must always be structured as trusts. A trust is an arrangement where a third party (called the “trustee”) holds and manages assets for the benefit of others (the “beneficiaries”). An SMSF is a special kind of trust that operates for the sole purpose of providing retirement to its members (the beneficiaries).
An SMSF can have no more than four members and all members are required to act as trustees (or alternatively, be directors if the SMSF appoints a company to act as its trustee). The trustees are legally responsible for the management of the SMSF’s assets – i.e. for the selection and management of all the fund’s investments – and for ensuring the fund complies with all relevant laws and regulations. This doesn’t mean that an SMSF trustee cannot seek the advice and services of experts, it is just that the ultimate responsibility (and legal liability) always rests with the trustee and cannot be passed on to others.
Is an SMSF right for you?
SMSFs can be an excellent vehicle to save for your retirement, but they are certainly not suitable for everyone.
The main advantages of an SMSF include:
(1) Greater control: SMSFs give you the freedom to invest and build your retirement savings as you choose;
(2) Flexibility: An SMSF can provide wider investment choices and give more flexibility in how you construct your investment strategy and pass on your wealth.
(3) Cost efficiencies: Depending on your circumstances, an SMSF may offer potential costs savings (especially if you pool your super with family members to share the running costs).
(4) Potential Tax savings: SMSFs can provide more scope for individuals to manage the tax effectiveness of their retirement savings. This is usually more limited in a mainstream fund environment.
At the same time, there are a number of risks and other potential issues to consider
(1) Active involvement: Running an SMSF requires you to become more actively involved in managing your investments and ensuring your fund complies with all the rules and regulations. That is the natural trade-off which comes from having the control and flexibility of your own super fund.
(2) Knowledge and expertise requirements: Self-managing your retirement investments requires you to have the knowledge and skills to make your own investment decisions and be aware of all your legal responsibilities as trustee (and/or to be able to select and work with the right advisers to support your decisions). In contrast, a mainstream fund can represent a simpler “set and forget” approach
(3) Costs: Running an SMSF will incur various costs (including annual accounting, audit and tax fees). It is important that your super fund balance is large enough to ensure the operation of your SMSF is cost effective.
(4) Potential loss of benefits: Most mainstream funds offer group life and disability insurance policies to their members. Setting up your own SMSF will usually mean that you will have to arrange for separate insurance cover (which may be more expensive or difficult to implement depending on your personal circumstances).
If you are considering setting up your own SMSF, it is important to understand both the advantages and the risks and responsibilities that come with operating an SMSF, and if appropriate, to seek professional advice from your accountant or tax adviser.