Introduction
A self-managed superannuation fund (SMSF) is a tax advantage trust structure set up to manage retirement savings on behalf of its members. It is controlled by its members who must be the trustees (individual trustees) or directors of the trustee company (corporate trustee).
SMSFs are a popular choice for many people who want to take control of their financial future and have greater flexibility over how their retirement savings are invested in an environment that includes significant tax advantages. While this is the main reason for people establishing an SMSF, another advantage could be thecost savings.
Tax Advantages
Let us look at the tax advantages of superannuation first. In the accumulation phase, the tax rate is 15% and in the pension phase, the tax rate is nil. While a member is still working and contributing to a superannuation fund his/her personal marginal tax rate is likely to exceed 15%, so investing through the superannuation system is more tax efficient. After ceasing work and drawing a pension from his/her fund, the tax on the fund’s income is nil and there is no tax on his/her pension, provided that the appropriate legislation is complied with. Contrast this with investments outside the superannuation system where the income from these investments is taxable.
Investment Control
With an SMSF, you can have direct control over your investments. You can buy and sell individual investments such as shares, property, and term deposits in the name of the fund or, invest in managed funds which make investments on your fund’s behalf. This gives you more flexibility than investing in a commercially available superannuation product which may not have the investment choices you desire.
A disadvantage of investing through an SMSF is that you must set up and maintain a written investment strategy as required by legislation. That being said, the tax advantage of investing through superannuation certainly outweighs this disadvantage.
Costs
There are of course, costs to running an SMSF. These include administration costs, investment costs and audit costs. Your administration costs will vary depending on how much work you do yourself and how much you pay your accountant or fund manager to do the work for you, but you would likely be looking at something in the order of $5,000 per annum. Investment costs depend on how much you use an investment advisor, and the audit cost is in the order of $500 per annum, depending on the complexity of the fund.
Comparing these costs with investing in a commercial superannuation product, you will often find that a SMSF is not financially viable unless you have about half a million in assets.
Trustee Responsibilities
Being a trustee of a SMSF carries significant responsibilities. You need to comply with relevant trustee legislation which includes always acting in the interests of all the SMSF’s members. If you are investing for yourself, you only need to consider yourself but if you are a trustee of a fund with other members, you will need to be mindful of your responsibilities towards them.
Time
Managing a SMSF requires time. Even though you may pay your accountant to look after the administration side of things, you are still a trustee and as such, will need to spend time on the fund in order to discharge your trustee responsibilities.
Professional Guidance
Unless you work in the field, you will need professional help in establishing the fund as well as the ongoing administration. The place to start is you accountant or trusted financial advisor. If you do not have an accountant or financial advisor, then you will need to do some research. Firstly, ask someone you know who has a SMSF and hear their experiences in running their own fund. Then talk to accountants and financial advisors and find out what their experience is with SMSFs. Don’t forget to check their credentials!
Conclusion
If you are willing to invest the time and accept the responsibilities of trusteeship, SMSFs are an excellent way of maximising your investment returns. However, you do need to consider carefully what is involved and whether an SMSF is suitable for you.
In my own case, have found that managing my own SMSF has been very worthwhile. I do a lot of the administration work myself so I can stay familiar with the practicalities of running a fund and my work as an actuary requires me to keep up to date with the appropriate legislation. I do feel however, that most people operating their own fund would need the professional administration services of an accountant or fund manager.