Story sponsored by Findex.
Self-Managed Super Funds (SMSFs) are incredibly popular in Australia, especially amongst people who are nearing retirement and want greater control and flexibility over their superannuation.
There are currently 599,678 SMSFs (as of June 30) with a combined value of $748 billion, representing 18 percent of Australian household wealth. It's a big market.
They potentially offer many benefits over alternative superannuation structures, provided that members are willing to be more involved with their fund and are supported by good advice.
Professional advice to help you manage your SMSF is readily available, but the overall responsibility for running your SMSF sits with you.
The Financial Services Royal Commission has prompted many to review their superannuation arrangements. Here are six things you need to consider when setting up or running an SMSF:
1 - Suitability of the structure
With compulsory superannuation leading to more than two trillion dollars' worth of investments across Australia, there is no shortage of fund structures available.
Ask yourself the question: Which is the right type of super fund for me?
Many people choose an SMSF because it puts them in the driver's seat, giving them more control and flexibility than other fund structures.
Investment choice is another common reason, as you can invest in assets that other super funds won't even consider.
The SMSF also allows you to structure member accounts to make the most of super's tax concessions, while complying with the various legislative caps and limits.
However, SMSF members are required to be trustees of their fund, meaning there is a higher level of responsibility and personal effort - this is the primary trade-off.
For most SMSFs, professional administration and advice is essential, but the more assistance you seek the more your fund will cost to run.
At least $500,000 in super assets is a decent rule of thumb to ensure the SMSF is cost effective. But a lower balance SMSF may still be viable if significant contributions are planned.
2 - Navigating the super rules
Superannuation law is complex, and SMSFs come with their own set of regulations. There are very few people that can navigate these rules without professional assistance.
The risks of getting it wrong far outweigh the costs of that assistance - a fund found to be non-complying can be taxed almost half the account balance!
Using an accountant or professional administration service ensures compliance requirements are met and potentially costly breaches are avoided.
3 - Understand your investments
An SMSF member should understand the types of assets in use, and where they sit on the risk-return spectrum. Awareness of specific risk factors applying to individual investments or asset classes is important, such as the use of leverage or significant currency exposures.
Liquidity is particularly important, not just to meet pension payments but in case a member requires a payout earlier than anticipated.
The asset mix in the fund must cater for a range of different scenarios and members' various objectives.
SMSF members have a range of investment experience, and some will feel comfortable doing it themselves, but the less experienced you are the more likely you need the advice of an investment professional.
4 - Transparency around your investments
Like any investor, an SMSF trustee should understand conflicts of interest that may influence the advice they receive. Typically, this takes the form of an incentive for the business or individual recommending a financial product.
Some conflicts are obvious, some are subtle, and some are more material than others, but there can be valid reasons in the client's best interest for recommending such products.
The key issue is disclosure. You should be able to hold an open, transparent discussion with your adviser around fees and conflicts of interest, with valid alternatives presented if you are uncomfortable with a particular product or asset type. Written disclosures should be consistent with those discussions.
5 - Costs of your fund
Excessive fees can have a large impact on your super balance over time, so fee efficiency is an important consideration for your fund.
With the range of fee types and collection methods in the financial services industry, it is easy to misconstrue the cost of a financial product or service. Super members often think they are paying less than they really are.
Fees are unavoidable, but only by understanding all the costs and what they relate to can we judge whether there is value for money in the context of the overall SMSF balance.
6 - Regular reviews of your super and investments
Delayed investment decisions represent a significant compliance risk and can be hugely detrimental to the fund balance over time.
It is vital that SMSF trustees put members' money to work by implementing and maintaining an investment strategy. A degree of investment automation may be helpful and there are various ways to achieve this.
Given the heightened responsibility and involvement required of SMSF members, it is vital to consider your capacity to meet these commitments in future - family circumstances, career, travel plans, residential status, and members' health profile are all factors to consider.
In summary, an SMSF gives you control over your future
SMSF members enjoy a range of advantages over mainstream super funds, with more control over outcomes, and greater structuring options to maximise the benefits of super.
A long-term perspective is necessary, but if your situation changes an SMSF can be unwound and moved into a lower maintenance super fund.
A viable and beneficial structure will exist provided you source the professional advice you need and regularly review the structure's suitability. Questions to consider at review time include:
- What are the benefits of an SMSF to the members?
- Are we meeting our trustee responsibilities?
- Are we receiving third party advice that is in the best interest of members?
We all aspire to a certain quality of life in retirement, and well-managed superannuation will go a long way to meeting those aspirations. If you'd like to discuss your superannuation options, contact your financial adviser.
If you'd like to find out more about SMSF's, superannuation and the market, Findex is hosting an event on Tuesday, November 12, from 6pm to 8:30pm in the Crema Room, East Hotel. To RSVP, visit: http://bit.ly/SMSFCanberra
Story sponsored by Findex.
- The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex Advice Services Pty Ltd, ABN 88 090 684 521, AFSL No. 243253.