5 myths of self-managed super funds (SMSF)

Posted on 21/2/2022

Private Wealth

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Overview:

Have you pondered the idea of setting up your own self-managed super fund (SMSF) in your golden years? Well, why wait for your golden years to arrive? SMSFs are more frequently seeing younger Australians sitting in the driver’s seat for their super journey. We debunk some of the myths surrounding SMSF and look at the considerations for setting one up.
5 Myths of Self-Managed Super Funds

MYTH 1: SMSFs are only for retirees

For many people the thought of an SMSF conjures up images of those in the midst of retirement; the grey-haired populace investing their retirement savings, while simultaneously living their best lives on the profits. Although this is sometimes the case, many of the most successful SMSF contenders start well before retiring age.

“Superannuation is one of the key financial considerations you make during your lifetime and sets you up for your retirement years”, says Kerry Bosnich, Director of SMSF at Perks Accountants & Wealth Advisers.

“An SMSF provides you with greater control of your retirement savings and can enhance your ability to generate wealth.”

“The earlier you can start planning for your retirement, the better the position you will be in when the time arrives. It’s not surprising that the vast proportion of our new SMSF clients are people in their 40’s and 50’s.”

MYTH 2: SMSFs are only for the rich

You don’t have to be rich to set-up an SMSF. In fact, over a certain threshold it can be just as expensive, if not more so, to remain in an APRA regulated fund.

While the widely used rule of thumb was that you should have a balance of around $500,000 in super to warrant an SMSF, the SMSF Association recently released a statement that opposes this theory. According to a comprehensive research report undertaken by the University of Adelaide’s International Centre for Financial Services, it was found that there was found there was no material differences between the performance of SMSFs with balances of more than $200,000, compared to those of more than $500,000. In fact, the study reveals that once a fund balance reaches the threshold of $200k, it can achieve comparable investment returns and cost effectiveness to those of an APRA regulated fund.

The reason for this is that the one-off set-up costs and the ongoing accounting and compliance costs associated operating an SMSF will likely be at par with an APRA regulated fund…with the added benefit of increase flexibility and choice in relation to your investments.

Kerry recommends seeing an SMSF Specialist to weigh up the cost vs. benefit before you jump in headfirst.

“Ensuring that you have a sufficient starting balance is the first fundamental consideration in moving forward with the decision of setting up an SMSF.”

“The cost effectiveness of an SMSF generally scales as the size of the fund grows due to the fees associated with establishing and maintaining the fund. These include the ASIC fees related to establishing a corporate entity, annual SMSF ATO supervisory levies and other accounting and auditing costs associated with the management of an SMSF”, explains Kerry.

MYTH 3: An SMSF is set up on an individual basis

If your balance is a bit off the $200k mark, don’t worry – there’s more than one way to approach an SMSF.

You can consider setting-up an SMSF with and number of people:

  • your spouse
  • children
  • other family members

The purpose is to combine your retirement savings for a heftier starting balance. The current limit is six members per SMSF.

“Often couples set up a meeting with us to discuss the feasibility of setting up an SMSF together. It starts by having a simple conversation about their plans for retirement and their thoughts on investing independently. If both are engaged with the idea and they are on the same page with their financial goals, then an SMSF can be a good fit to achieving them with greater flexibility and control of how their money is invested,” shares Kerry.

MYTH 4: An SMSF is a “Set & Forget” super option

Some people have the perception, particularly if investing in property portfolios, that an SMSF is a simple set and forget super option. This is not the case. There are some significant time commitments in terms of managing an SMSF.

“As an SMSF trustee, you have continuing obligations that you must undertake as part of your role in managing the SMSF. This may take time out of your daily life, so you need to be aware of these obligations before entering into a formal arrangement,” says Kerry.

“As part of the establishment process, all SMSF trustees are required to sign an ATO Trustee Declaration within 21 days of becoming a trustee. This declaration sets out your obligations as a trustee and confirms that you understand them.”

“You will also need to regularly review your strategy to ensure it remains aligned to your objectives, which may also change depending on your personal circumstances.”

If you do decide to establish an SMSF, it is worthwhile speaking with a specialist SMSF adviser who can help guide you through the process. There are several steps involved, some key decisions to be made and a significant amount of documentation is required. Most importantly, ensuring you clearly establish your objectives and develop a strategy that will help get you there.

MYTH 5: You need to be a stock-market savant, or a property mogul, to have an SMSF

You don’t need to be a Wolf of Wall Street to start an SMSF, however you should be experienced in making investment decisions and have good financial literacy.

For some, a key motivator for setting up an SMSF is the desire and ability to invest in property.

“While investing in property can be a great opportunity to diversify your superannuation investment portfolio, it can also become quite complex to structure, particular when gearing is involved,” says Kerry.

“It’s important to understand that superannuation legislation is complex. Seeking specialised advice in initial investments will ensure you are aware of all the relevant legislation and help you to develop a portfolio structure that will be beneficial for your retirement objectives.”

Soliciting the right advice can empower you to make confident and calculated risks when investing your super, ultimately allowing you to retain control of your retirement savings and self-manage your financial future.

Getting Your SMSF Started

“It’s important to understand why you want to establish an SMSF and what you are hoping to achieve,” adds Kerry.

“For many trustees, control is a key consideration. This is because an SMSF provides significantly more choice and flexibility in how you choose to invest your retirement savings.”

“People that are approaching or are in the midst of retirement, may want to seek one-off advice from a wealth adviser and then decide and execute on their own. For others that want to simplify decision-making process, it may make sense to hand over the reigns to a wealth adviser entirely. It really depends on the individual, so the decision shouldn’t be taken lightly.”

In essence, having an SMSF is all about choice and control. For those that are both interested in directing their investments, and are well-attuned to managing their own affairs, setting up an SMSF may be a worthwhile consideration.

 

Download our checklist for setting up an SMSF here

Speak to one of our SMSF Directors.

Kerry Bosnich

Kerry Bosnich

Kerry possesses a passion for retirement planning and tailoring contribution strategies.

Kim Bigg

Kim Bigg

Assisting clients to plan for the transition to retirement and the associated requirements of estate and succession planning. Kim is a specialist in Self-Managed Super Funds.

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