Should I set up an SMSF?

Women with CentsBlog, Superannuation

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“Hi Tash, what is the deal with self-managed super funds, are they the way to go? What are the pros and cons of doing it yourself?”

So for those who haven’t heard of the concept, a self-managed superannuation fund (or an SMSF) is a private superannuation fund that you manage yourself, instead of it being managed for you by a traditional super fund (usually referred to as an industry fund or a retail fund).

While the idea of managing your own super can be tempting for a number of reasons, there are a number of things to consider before you dive in.

Do you want more control over how your money is invested?

While SMSF’s can be beneficial as you have more control over how your money is invested, today some industry and retail super funds are offering a direct investment option, which also allows you the ability to select specific investments and can therefore be a good compromise to setting up an SMSF. A simple Google search for “direct investment super” can help you find the funds that offer this option (such as Australian Super, ING, Hostplus to name a few).

Which is more cost effective?

When you have a reasonable balance, an SMSF can often be more cost-effective than an ordinary super fund. However, if your balance is low, they can be quite costly (both to set up and run). ASIC advises that unless you have over $200k in super, it may not be in your best interests to set up an SMSF as the costs involved in running an SMSF as a percentage of your balance can be greater than what other managed super funds charge, and would therefore end up eating away at your retirement savings.

Are you prepared for the responsibility?

There is a lot of paperwork to keep on top of when it comes to an SMSF. They operate under similar rules and restrictions to traditional super funds, only you are personally responsible for the decisions made (even if you get help from a professional in managing the investments) and for managing the ongoing documentation.

Are you wanting an SMSF so you can buy property?

Some people may choose an SMSF because they feel it is easier to get into the property market by using their super to purchase. But if that’s your thought process, there are a few things you should keep in mind.

  • Because a property is a significant investment, it will often tie up a large portion (if not all) of the money in your fund. That means that you’re unable to diversify into other investments like cash or shares – you’re putting all your retirement eggs in one basket which can be quite risky.
  • If one of the members of an SMSF dies, is disabled or reaches retirement age (you can have up to four members) the fund must have the ability to make payments. So if all the money is tied up in one asset, such as a house, it may force the fund to sell the property to free up cash.
  • While it’s a nice thought to use your super to buy your home, or a holiday home, this is against the law. You cannot live in or rent the property owned by the super fund (with some exceptions for commercial property). So you can’t really benefit from the purchase of a property in the fund.

The bottom line? If you’re considering setting up an SMSF I would always recommend that you seek professional advice to make sure it’s right for you.

If you’d like to learn more about managing your super, check out our Making Cents of Money club!

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