July 21, 2022
Sam Draper

Is a Self-Managed Super Fund right for you?

For the majority of us, professional super funds control the investment decisions for our superannuation in return for a fee. However, more than a million Australians instead opt for Self-Managed Super Funds (SMSF); a private super fund that is managed by the members themselves...

Is a Self-Managed Super Fund right for you?

Australian employers have been making mandatory contributions to their employee’s super funds since the Superannuation Guarantee was introduced in 1992.

For the majority of us, professional super funds control the investment decisions for our superannuation in return for a fee.

However, more than a million Australians instead opt for Self-Managed Super Funds (SMSF), a private super fund that is managed by the members themselves.

Whilst an SMSF might outperform one of the APRA-regulated funds (APRA is the Australian Prudential Regulation Authority), it also comes with a wave of risks and responsibilities that must be taken into consideration.

In this article, we’ll explore the pros and cons of Self-Managed Super Funds and whether it’s the right strategy to fund your retirement.

What are the pros of a Self-Managed Super Fund?

The biggest reason for choosing a Self-Managed Super Fund is that people want to be in control of their own finances. An SMSF lets you make your own investment decisions and gives you the full responsibility of accumulating funds for your own retirement.

An SMSF also gives you access to a wider range of investment options that would otherwise be unavailable through standard super funds. SMSFs allow you to invest in (almost) anything, providing the asset meets regulations and the sole purpose test.

This includes the ability to directly invest in property, allowing you to earn income from the rental payments as well as the capital growth of the property. Unlike a standard super fund, you also have the freedom to invest in physical gold, art, stamps, collectables or any other assets you deem appropriate.

Another benefit of SMSFs is the ability to combine your capital with others and boost your purchasing power. SMSFs allow you to pool your superannuation with up to five other people, which can help you purchase assets that might otherwise be unaffordable. This feature is particularly useful for sharing with family members and funding your retirement by investing in property.

SMSF returns are taxed at a maximum of 15%, the same beneficial tax rate that is available at other super funds.

What are the cons of a Self-Managed Super Fund?

Taking on a Self-Managed Super Fund means also taking on the many responsibilities and risks that are associated with an SMSF.

With an SMSF, you’re accountable for all compliance, administration and investment decisions that are required to manage the fund. Importantly, this means that you’re personally liable for all of the fund’s decisions, regardless of whether you received professional help.

If you lose money from the fund through theft or fraud, you won’t be eligible for any government compensation schemes to reclaim these losses.

For the super fund to be worthwhile, an SMSF demands a high level of investing expertise and sound decision-making. In an industry or retail super fund, these decisions are made by investment managers who are highly skilled and experienced in this area.

This is mainly why, on average, APRA-regulated funds have historically outperformed Self-Managed Super Funds.

Graph showing returns of SMSF's vs APRA-regulated super funds
Source: moneysmart.gov.au

On top of investing knowledge, SMSF’s require an extensive legal understanding of the compliance and tax laws that govern superannuation. This can bear a heavy burden as the legislation is often complex and can impose a high penalty for trustees who breach their obligations. Whilst an accountant will be able to help with these requirements, the responsibility ultimately falls on the trustee to ensure their fund complies with the relevant rules and legislation.

Ultimately, one of the biggest disadvantages of an SMSF is that setting up and managing the fund is very time-consuming.

According to an SMSF Investment Report in 2019, trustees spend an average of eight hours per month managing their SMSF, which is over 100 hours per year. For a lot of us, this is time that we don’t have and outsourcing this work to a professional super fund makes life much easier.

The ongoing costs involved with managing an SMSF can also be substantial. Professional help with the investing, accounting, tax, legal and financial components is expensive, with SMSF’s costing members an average of $6,450 annually (according to 2019 figures).

An SMSF might be right for you if…

  • You already have a large superannuation balance. Due to the extensive costs involved with managing an SMSF, you will likely need a balance upwards of $500,000 for an SMSF to be cost-effective. Most standard super funds increase fees as your super grows in value, whilst ongoing SMSF costs will generally stay the same.
  • You have the time. If you’re prepared to take on often tedious and time-consuming responsibilities of an SMSF, then a Self-Managed Super Fund might worthwhile. Alternatively, not being 100% committed to your SMSF can hurt your fund’s performance and leave you at risk of failing your legal and tax obligations.
  • Investing in property is an important part of retirement wealth strategy. From our experience, SMSF members often choose that path because they wish to use their savings to build a property portfolio, hence the need for a Self-Managed Super Fund. If your retirement wealth strategy is more focused towards stocks, a standard super fund will likely be a much safer and easier approach to growing your superannuation.
  • You already have extensive investing and legal knowledge. If you’re hoping to outperform other standard super fund options, we highly recommend that you first have a strong understanding of investing and diversification. The performance of your fund is ultimately your responsibility and any decisions you make will have lasting consequences for your retirement. Equally, not fully understanding your legal or tax obligations can cause you headaches and, in the worst cases, severe financial ramifications.

If you’re weighing up whether to switch to an SMSF, we recommend you first speak with a professional you trust who can advise you the right approach for your individual circumstances.

If you do have an SMSF and you need help managing the administration, our accounting team offer SMSF administration services.

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