Uncover the Pros and Cons of a Self Managed Super Fund (SMSF)

Advantages of an SMSF

Investment Control

Most SMSFs have fairly mainstream investments such as listed shares, cash, term deposits and managed funds. However, they can also invest in a range of assets that are are generally unavailable in other types of super funds. This includes things like property, unlisted and international shares, IPOs (initial public offerings) and even alternative investments (cryptocurrency and collectables such as artwork). SMSFs can even borrow to make investments.

Cost Effectiveness at Scale

For funds with higher balances, SMSFs can be more cost-effective than retail or industry funds due to a fixed yearly administration cost that doesn’t increase as your balance increases. The amount is instead dependant on the investment options or asset classes you have chosen and is not based on the value of your super benefit.

Pooling balances and investing together

One of the great benefits of an SMSF is that you can combine your super with a partner, family member or even a friend and invest your super together. While your SMSF accountant will be keeping a tally behind the scenes of how much super a person ‘owns’, it means couples can manage just one super investment portfolio rather than handling their super accounts entirely separately. Learn more about shared investing.

Tax Planning Flexibility

While all super funds are subject to pretty much the same tax rules, there are some tax and other strategies large funds choose not to implement because they don’t suit all the members. In an SMSF, you can make the most of the tax concessions available in super and do whatever is worthwhile for you.

Estate Planning

SMSFs offer more flexible estate planning options and perhaps even more importantly, the ability to give your partner or family significant control and flexibility when it comes to paying out your super after you die.

Portability

Your SMSF is your lifetime retirement savings fund. You can switch service providers while keeping the same fund and investments.

With other super funds, a big change will often mean switching from one super fund to another. Not only is this time consuming, but it can also mean taxes like a capital gains tax are paid on your balance, reducing your retirement savings.

Agility

In an SMSF, you can respond instantly to new legislation or strategies that are beneficial for you. Unlike other super funds, you’re not dependent on the trustee deciding to do it, you get to decide. For example, SMSFs can start pensions the moment a member decides to do it (as long as they’re eligible). Other funds require forms. SMSFs can urgently pay out benefits to (say) a spouse when a fund member dies. Other funds need processes to make sure they are paying the right person.

Transparency

With an SMSF you get complete visibility over all investments, fees, and fund performance without hidden costs or unclear investment strategies.

Disadvantages of an SMSF

Personal responsibility

Superannuation in general has a lot of rules, and in a large fund someone else looks after these for you. In an SMSF however, you’re responsible. You can get help, but you’ll need to pay for it and ultimately, you’re still personally responsible for everything your SMSF does. Learn about roles in an SMSF.

Should your SMSF fall victim to fraud or theft, you and the other members can find avenues for compensation, but these are limited to taking action against service providers etc. SMSFs don’t have access to the special compensation scheme established under the super laws that protects members of other funds. 

Time and Complexity 

Managing an SMSF can be, in part, dependant on your own abilities and how much you will need to outsource to professionals. You'll be responsible for understanding the frequently changing superannuation laws which is why most trustees appoint an administrator (or accountant) to help them. They will take care of the financial statements, arrange audits, keep you compliant with superannuation and tax laws, and lodge returns. This leaves the investment research and management to your, or your adviser if you prefer.  

Note – Although you can outsource some of the work to others, you will ultimately need to be across the ins and outs of your own SMSF yourself. 

High Setup and Ongoing Costs 

Annual costs typically range from $2,000-$5,000+ depending on the type of assets you choose. This will cover accounting, auditing, and administration fees. Setup costs can be substantial. If the account balances in the SMSF are small and do not grow quickly, the fixed costs associated with running the SMSF can mean that the SMSF is a more expensive option than a non-SMSF. Learn more about SMSF Costs.

Limited Investment Diversification

Smaller SMSFs may struggle to achieve proper diversification compared to large institutional funds with a lot more money.  

No Professional Investment Management

You lose access to professional fund managers and institutional investment opportunities available to larger funds. Of course, you can appoint a financial adviser or stockbroker to assist with investment decisions but your fund will have to pay for these services. 

Is an SMSF right for me?

SMSFs typically work best for people with super balances over ~$200K, some financial knowledge, time to dedicate to management, and clear investment objectives. For others, well-performing industry or retail funds may well be the better option.

Things to consider before setting up an SMSF

What are your investment goals?
With an SMSF you can invest in assets that are generally not available in other types of super funds. For example, if you want to borrow to buy a property with your super you can only do this with an SMSF.

Do you have enough super?
There is no specific amount you need to commence an SMSF, however, generally, the lower the balance of an SMSF the less cost effective they tend to be. SMSFs typically have a fixed administration cost meaning the larger the fund’s balance the less the fixed expenses are as a proportion of the fund. Remember the fund balance can be made up of total super savings of up to six members.

How much do you need to know about superannuation?
You need to have enough financial knowledge to understand and undertake your responsibilities as trustee. You don't need to be an expert but you do need to be willing to learn about the rules of your fund, or work with someone who can guide you, a financial adviser, a lawyer or an SMSF administrator like Heffron. SMSFs are our expertise and we can help to ensure you follow the rules and meet your responsibilities.

How much time do you need to manage an SMSF?
You will need to dedicate time to making sure your SMSF is managed in an effective and compliant manner. The amount of time you spend will depend on who you partner with and the complexity of your investments. By partnering with Heffron, you will save time on ensuring your fund is compliant with the rules because we do all this for you.

What are the responsibilities of trustees?
Superannuation law requires trustees to always act honestly, exercise care and act in the best interest of all members. In addition to these guiding principles, trustees have ultimate responsibility for all aspects of running the SMSF. Learn about Trustee responsibilities.

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This article is for general information only. It does not constitute financial product advice and has been prepared without taking into account any individual's personal objectives, situation or needs. It is not intended to be a complete summary of the issues and should not be relied upon without seeking advice specific to your circumstances.