Recently, some of our clients have enquired whether we can provide advice on Self Managed Super Funds (SMSF). YES, we are accredited to provide advice in this area. If you are considering setting up a SMSF please call or email us for assistance.
We have attached an extract from ASICS MoneySmart website that provides some useful tips and traps to be aware of.
Do it yourself super
Some people want the control that comes with managing their own super, but taking control means being responsible for managing your retirement funds which will involve significant time and effort. SMSFs can be suitable for people with a lot of super and extensive knowledge of financial and legal matters.
You must understand your legal responsibilities and the investments you make because even if you employ professionals to help you, at the end of the day you are still the one responsible.
What is a self managed super fund (SMSF)?
A SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO), that you manage yourself. SMSFs can have up to four members. All members must be trustees (or directors if there is a corporate trustee) and are responsible for decisions made about the fund and for complying with relevant laws.
How do self-managed super funds work
SMSFs are a legal tax structure with the sole purpose of providing for your retirement. They operate under similar rules and restrictions as ordinary super funds. Set up costs and annual running expenses can be high so you’ll need a large balance to make the fund cost effective.
When you run your own SMSF you must:
- Carry out the role of trustee or director, which imposes important legal obligations on you
- Set and follow an investment strategy that ensures the fund is likely to meet your retirement needs
- Have the financial experience and skills to make sound investment decisions
- Have enough time to research investments and manage the fund
- Budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice
- Keep comprehensive records and arrange an annual audit by an approved SMSF auditor
- Organise insurance, including income protection and total and permanent disability cover
- Use the money only to provide retirement benefits
If you decide to set up an SMSF you are personally liable for all decisions made by the fund even if you get help from a professional or another member makes the decision.
Questions to ask before you set up an SMSF
Have you considered other do-it-yourself (DIY) super options?
Many professionally managed super funds have DIY investment options which let you choose which assets you’d like your super invested in such as shares, exchange traded funds and term deposits. This gives you some control over your specific investments without the legal and administrative requirements of running an SMSF.
Will your self-managed fund outperform your current fund?
Super funds use highly skilled professional managers to invest your super money. Can you do better than the professionals? Consider whether the investments you choose will perform as well as your professionally managed super fund. Are you confident you can accurately measure returns?
Have you considered the costs?
Like all super funds, your SMSF will have costs associated with running the fund. These include the cost of investing, accounting and auditing for your SMSF, which may be much higher than what you are currently paying. These costs cut into your retirement savings.
Will you lose valued benefits?
Super funds usually offer discounted life and disability insurance. If you set up an SMSF you will have to purchase your insurance separately. Make sure you look into your insurance options before closing your current super account as age and health issued can limit your ability to buy a new policy and increase your premiums.
Do you know enough?
Are you aware of all your legal responsibilities? Do you understand the different investment markets? Can you construct and manage a diversified portfolio of investments? Do you know the tax implications?
What if your relationship with others in the fund changes?
If there is more than on member in your SMSF, have you written a plan outlining what will happen in the event of ill health, death, relationship breakdown, or waning interest?
If an SMSF member loses money due to theft or fraud they do not have access to any special compensation schemes. Also, SMSF members do not have access to the Superannuation Complaints Tribunal to resolve disputes.
What should you invest your SMSF in?
Having access to a broader range of investments is often cited as a reason for starting and SMSF. Through a self-managed super fund you can invest in the usual investments such as shares, term deposits, managed funds and property. You can also hold alternative assets such as antiques and artwork in a self-managed super fund.
The ability to choose your own share may have been a driver for setting up a SMSF, but unless you have a lot of money to invest, you are unlikely to be as diversified as a fund manager, who has the advantage of using pooled funds to buy a broad range of shares.
Many SMSFs hold collectibles such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine. There are very strict rules on holding these assets in your Self-managed super fund.
These assets, when held within a SMSF, must be insured and they cannot provide a present day benefit. This means that artwork cannot be displayed in your home or business, you cannot drive a vintage car, you cannot wear jewellery or drink the wine.
For more information, see the ATOs webpage on collectibles and personal use assets.
Memory loss, dementia and SMSFs
Many of us will experience some form of memory loss as we age, However, when you run your own super fund, the financial consequences of significant memory loss, from illnesses such as dementia, can be very serious.
What if you go bankrupt?
By law, if you or another trustee of your self-managed super fund becomes bankrupt, that person can no longer remain a trustee, director or member of the super fund. SMSFs have a 6-months grace period to remove the bankrupt trustee and make arrangement to deal with their super assets.
If you are the only member of your SMSF a new director will need to be appointed to manage the fund on your behalf while you are disqualified.
Seek legal advice about the actions you need to take to deal with bankruptcy and your SMSF.
Scams targeting people with SMSFs
Be wary of people who approach you to set up a self-managed super fund with the aim of withdrawing some or all your super to pay off debts. These arrangements are illegal. See ASICS Money Smart website “superannuation scams” for more information.