SMSFs are a fantastic way to empower people to take control of their savings, holding all the power of investments in their hands as opposed to leaving it up to their super fund.
Managing an SMSF provides autonomy in your financial decisions, enabling you to choose where funds are invested in accordance with your risk appetite, investing strategy and overall financial goals.
So if you’re considering an SMSF for yourself, here’s what you need to know!
An overview of SMSFs
A typical approach to superannuation might be to passively invest in it through employer contributions.
But if you’re a sole trader or business owner, this might be tough, as it can be challenging to prioritise, especially when you’re in the beginning phases of growth.
An SMSF gives you a far more active role in your superannuation, providing higher levels of flexibility. But as with anything finance-related, there are advantages and disadvantages of an SMSF.
Advantages
If you love the idea of having higher levels of control over your super (and have the stomach for the increased risk!) then here are some key advantages that might interest you:
Diversification
An SMSF lets you invest in a broader range of assets than a standard superannuation fund. These include assets like shares, cash and property – though there are certain stipulations that must be followed.
Estate planning
Self-managed super funds can facilitate effective estate planning by giving trustees control over how, where and to whom their assets are distributed after they pass.
This might be tough to think about, particularly if you’re not even at the retirement stage, but it’s just one more effective way to strategically distribute your wealth.
Borrowing for investment
SMSFs can also allow you the option to borrow funds for investing in property. This can increase your overall fund value and diversify your investments to better protect your wealth.
Disadvantages
While there are a number of very valuable benefits with an SMSF, it’s important to understand the disadvantages, to help you make an informed decision.
Complexity
Running an SMSF successfully requires fairly frequent, active management.
Responsibility for key concerns like legal and regulatory requirements falls on your shoulders. They can be highly time-consuming and potentially overwhelming if you’re not well-versed in topics like finance and taxation laws.
Ineffective at cost-saving
SMSFs can be cost-effective for those with larger superannuation fund balances, but if you’ve got a smaller amount of savings and not much of an investment portfolio, the administrative costs can end up outweighing the cost benefits.
Higher risk
Part of the benefits of having your superannuation run for you through a managed fund is the limited risk. Typically, superannuation funds avoid playing too fast and loose with the investments of their fund members.
However, your SMSF can be as risky or as safe as you like, so while you could potentially receive higher returns than you would with a general super fund, you can equally lose higher amounts too.
Maintaining tax compliance and legal regulations
Remaining compliant with tax and legal regulations is absolutely essential when you’re managing an SMSF.
While you may find you’re able to access favourable tax strategies, you’re also required to comply with various regulations, such as:
- Contribution limits
- Investment compliance
- Annual reporting and audits
- Sole purpose tests
Non-compliance can result in quite severe penalties like fines and loss of compliance status – even legal action.
So if you feel compliance might be an issue, then it’s best to either stick with a managed fund or leave it to expert financial planners.
