SMSFs: the pros and cons

With an SMSF, you’re in charge – you make the investment decisions, so you can directly control and manage your retirement savings. However, you’re also responsible for the fund – from overseeing investment strategy and execution to complying with Australian superannuation and tax law.

Here are a few pros and cons to establishing an SMSF:

Advantages:

• Total investment control: With an SMSF, you’re in complete control. You set the investment strategy in line with your own investing goals and timeframes, and you determine the assets the fund invests in. When market conditions change, you have full flexibility to adapt or change course.
• Range of choice: All SMSF investments must be made on a commercial “arm’s length” basis, and must fulfil the “sole purpose test” of solely providing retirement benefits to members. Within this framework, SMSFs can offer a broader range of investment opportunities, including asset classes such as residential and commercial real estate. SMSFs also enable you to invest in less common asset classes, from artwork to physical gold and investments in some unlisted entities.
• Pool super: Multi-member SMSFs can include up to six people. You can therefore pool your super with up to five other people, and potentially gain access to additional or more costly investment opportunities.
• Transparency: As you are making the investment decisions for the SMSF, you have a clear line of sight on what is included in the fund’s portfolio. You will therefore be more aware of how your super monies are invested, and the performance of those investments.
• Investment cost efficiency: Fixed SMSF costs become more cost-effective as SMSF balances increase.
• Taxation benefits: SMSFs enable you to implement tax strategies that best benefit you and your personal tax situation.

Disadvantages:

• Risk: SMSFs provide complete investment control – which has both upsides and downsides. If investment decisions go wrong, the responsibility is yours as trustee and the consequences are yours as the SMSF member. Maintaining an SMSF therefore requires some legal and financial knowledge, as well as financial market confidence.
• Time and effort: Operating your own SMSF is quite time-consuming, even when using a professional SMSF administration service.
• Compliance: As trustee, you’ll be responsible for your SMSF operating within the law, and violations may trigger severe penalties. SMSFs must follow the laws outlined by the Australian Taxation Office (ATO) and trustees have numerous regulatory and legal responsibilities. These governing laws and regulations may also change over time, requiring trustees to be constantly up-to-date on SMSF regulatory requirements.
• Fees and associated costs: Fixed SMSF costs become more cost-effective as SMSF balances increase, but the converse is also true – fixed SMSF costs may be less cost-effective for smaller SMSF balances. Set-up fees, annual reporting, audit requirements, investment management fees and professional investment advice/planning fees can make a dent in smaller SMSF balances.

It’s important to consider all of these factors before deciding if an SMSF is right for you.