More than one million Australians control their own superannuation investments through a self-managed super fund (SMSF), managing over a quarter of Australia’s $3.3 trillion asset pool.1 If you’re considering joining them, it’s important to first understand what you hope to get out of it.
Choice, control and flexibility tend to be the most common reasons people shift retirement savings out of a fund regulated by the Australian Prudential Regulation Authority (APRA) to manage their own investment strategy. However, the reasoning behind your decision will vary depending on your age and circumstances.
Kris Kitto, Director and Founder of Grow SMSF, an SMSF administrator, says he typically works with younger professionals who still have a long investment time frame.
“The main trigger is a desire to access more diverse investment options. Property is one driver, but there’s also a wider investment universe – SMSFs can invest in international shares, cryptocurrencies or very specific exchange-traded funds (ETFs), for example, whereas traditional funds generally don’t,” he says.
SMSF trustees who want more control over their investments typically believe they have the financial literacy to achieve better returns, or their balance has reached a level where the time and cost involved in self managing is worthwhile.2
SMSF vs traditional super
There are some fundamental differences between retail or industry super funds and SMSFs.
SMSFs | Retail and industry super funds | |
Regulated by | ATO. | APRA. |
Trustee structure |
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Responsibility for managing fund |
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Investments |
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Costs |
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Wind up |
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The pros and cons of managing your own super
An SMSF isn’t for everyone. Managing your own super is a significant financial decision, so it’s important to consider the risks as well as the benefits. Here are a few thought starters.
SMSF advantages | SMSF disadvantages |
Access a wider range of investment options. | You need the time, knowledge and skills to manage and execute your own investment strategy. If you lose money through theft or fraud, you may not have access to compensation schemes or AFCA. |
Have more visibility and control over where your money is invested. | You’re personally liable for the fund's decisions and for legal compliance, including regularly reviewing your investment strategy, accounting, record keeping and an annual audit. |
Opportunity to invest in property, including your own business premises if that suits your SMSF investment strategy. | You need to exercise caution when investing in property within your SMSF - for example, you cannot use your SMSF funds to pay off debts or buy a holiday house for personal use and penalties apply if you breach your obligations. |
Potential to leverage tax-effective investment strategies. | Investment, accounting, auditing and advice fees can end up being more than you would pay through your industry or retail super fund. |
You can pool your super with your spouse, business partners or working-age children. | Managing the exit of one member can be complex or involve selling major fund assets. If a member dies, another member may be able to take control and act against their wishes. |
You can pay for life, total and permanent disablement and disability income protection insurance through your SMSF. | If you transfer your entire industry or retail fund balance to your SMSF, you could lose more favourable insurance conditions or defined benefits. |
Common SMSF misconceptions
Kitto says the biggest concern new SMSF trustees have is around the paperwork involved in SMSF management.
“Yes, it takes time – and it should take time, it’s your retirement savings. But these days, the admin is much simpler and almost everything can be done electronically,” he says.
However, if you are an inexperienced investor, he suggests waiting a little longer before you make the SMSF leap.
“In my experience, an SMSF is not the best place to learn how to invest. You will always make mistakes as a rookie, especially in volatile markets. The more experience you have, the better – there is nothing wrong with waiting a few years.”
Most trustees he works with are self-directed. They have a good grasp of how to manage risk, diversification and cash flow so they don’t outsource investment decisions to a financial adviser. Kitto does recommend seeking professional help for specific decisions – including financial advice when moving into retirement phase, specialist tax and estate planning advice.
SMSF pitfalls to avoid
The biggest mistake Kitto sees people make is to attempt to do everything at the lowest possible cost.
“All things being equal, an SMSF actually should cost a bit more, because you’re getting extra flexibility,” he says.
For example, investing in the right trust structure from day one can help you avoid the risk of significant legal costs and complications later. At some point you might want to access a property loan through a limited recourse borrowing arrangement, or need to exit one member following a relationship breakdown6 and having an appropriate trustee structure may assist with these changes as they arise.
“It might be cheaper to start your SMSF with two individual trustees rather than a company trustee, but in the future there’s likely to be a situation where you need to change that – and that will cost more in the long run,” Kitto explains.
He says an SMSF administrator can do a lot of the heavy lifting from a compliance perspective and provide the accounting and taxation guidance an SMSF needs on a regular basis.
“Then you can pull in other professionals as needed – financial advisers, lawyers, mortgage brokers, specialist tax advisers. It can be very powerful for your SMSF to bring those experts in for specific opportunities or life changes, so they can work together for your mutual benefit.”
