Way back in 2015 I did a podcast with Josh Stega a.k.a. The Wealth Guy. This podcast is basically a couple of guys having a pretty solid chat around the ins and outs of self managed super funds as we attempt to answer the question: Is an SMSF right for you?
Josh’s goal is to bring the topic of personal financial planning into discussion and show you how to manage your money, build your wealth and reach your goals. The podcast I did with Josh was all about knowing if an SMSF is the right choice for you, your situation and goals.
So why not have a listen and find out?
If you don’t have time to listen to the podcast, these are some of the key aspects to think about when figuring out is an SMSF right for you:
Do you want to be engaged with your long-term savings (super)?
Engagement is the ‘holy grail’ when it comes to superannuation. Historically many people leave it too late and don’t even start thinking about their superannuation until retirement starts creeping up on the horizon. Self managed super fund trustees are different.
If you’re deciding whether an SMSF is right for you or not you need to be comfortable taking control of your super money and be confident to make the investment decisions that are in your best interest.
If you are already investing in your personal name, for example if you are running a share portfolio or have an investment property or two, its a good indication that an SMSF could be right for you. Running an SMSF investment portfolio can take some time, however as most people find it empowering, its not a burden provided you tap into the right advice and support where needed.
There is some administrative paperwork that needs to be handled, however this is relative minor if you’re working with a specialist SMSF accountant or administrator as the technology and software they use saves you time and free you up to focus on the more important decisions.
Is an SMSF really that much hard work?
The perceived complexity and ‘paperwork burden’ of an SMSF is often seen as a deterrent for people deciding if an SMSF is right for them.
I’ve been looking after SMSF compliance for close to 20 years and over that time running an SMSF has become easier and easier for trustees. There is some paperwork required, however its driven by the underlying investments made by the SMSF trustees. For SMSFs with simply investments (cash, shares, ETFs) there annual paperwork burden is relatively minimal.
If the SMSF has a wider range of investments, for example a commercial property leased to a related business or investments in unlisted private companies, there are increased compliance obligations and record keeping that needs to be undertaken each year.
If you come across commentary that states an SMSF comes with large administrative / paperwork burden, take it with a grain of salt as it’s a half-truth at best. Some cynical observers may even believe the perceived paperwork burden of an SMSF is a lie perpetuated by those with a vested interest in keeping people in a retail or industry superannuation fund!
SMSFs can be complex, but they can also be simple when it comes to the ongoing compliance. This is why its important to speak to a professional who can give you all relevant information so you can weigh it up and make a decision.
Are you comfortable with the responsibility of having an SMSF?
This is the serious aspect of deciding whether if an SMSF is right for you. As an SMSF trustee you’re responsible for:
- Ensuring your SMSF is set up the right way;
- Putting in place an SMSF investment strategy that’s suitable for you and other members of the fund;
- Making sure the SMSF accounts get prepared and audited each financial year and the tax return is lodged on time;
- Paying the SMSFs tax liabilities on time;
- Ensuring the investment rules and restrictions SMSFs have to comply with are not broken;
- Keeping appropriate records for your SMSF;
At the risk of downplaying the responsibilities of being an SMSF trustee, provided you have appropriate support from an SMSF Specialist Advisor you pick up the phone and speak to, it’s unlikely you will run into any legal or administrative issues.
A good indicator is your own personal finances. If you have your personal financial ‘house’ in order, chances are you have the necessary skills to take on the responsibility of an SMSF assuming you’re motivated to manage the investments yourself or work with an advisor (human or robo-advisor) to manage your SMSF portfolio.
In addition to having access to an SMSF Specialist Advisor, there are some really great resources available to existing and potential SMSF trustees including:
How much do you need for an SMSF?
Although you might be competent and motivated to set up an SMSF, having an SMSF may not be appropriate if you (when combined with other members of your fund) simply don’t have enough to justify the ongoing costs.
The exact amount you need to set up an SMSF is a matter of debate among accountants and advisers. There is no mandated minimum from the ATO who regulate SMSFs.
Based on the ATOs SMSF: A statistical overview 2017-18 the average SMSF costs per year are $3,934. This is based on a median (mid-point) of operating expenses which an SMSF would incur including SMSF auditor fees, SMSF accounting fees, SMSF administration costs, ATO SMSF Supervisory Levy and other deductions relating to the annual running of an SMSF.
If you use a 1% rule of thumb, then based on the above, having a balance of around $400,000 (combined with all members – typically a couple) makes having an SMSF cost effective compared to other superannuation options.
The above amounts however assume that the annual administration costs (i.e. the accounting and audit fees) equate to approximately $3,300 per annum. If you utilised a lower cost solution, and were only paying half that amount, then a combined super balance of $200,000 to $300,000 makes an SMSF comparable from a cost perspective.
When you’re with a larger APRA regulated industry or retail superannuation fund you effective pay the following types of fees:
- Membership fees
- Administration fees
- Investment management fees
With an SMSF you have the administrative costs which are typically higher and these are unavoidable for 99% of people as they don’t have the required skills to prepare SMSF accounts and tax returns themselves, and the audit must be completed by an independent auditor. Where you do get the fee savings however is on the investment management. If you are comfortable and confident implementing your SMSF investment strategy you can take on that responsibility yourself.
Another benefit is that the administrative fees are typically flat rather than being percentage based like most APRA regulated funds, therefore as your SMSF balance grows, you end up paying comparatively less in fees in many cases compared to an industry or retail fund.
Its important to mention that some SMSF trustees are initially willing to pay a premium in fees for the first few years (compared to their existing industry / retail super fund accounts) to access the direct control an SMSF provides. This approach is OK provided the SMSF balance does quickly catch up and make the self managed super fund comparatively cost effective.
Is an SMSF right for you if you are going overseas?
One of the quirks of an SMSF is that you can’t actively operate one if you are going overseas for an extended period of time (two years or more).
There are some strict rules around an SMSF being an ‘Australian superannuation fund’ so it’s important to seek advice in regards to your options. It is possible to keep the SMSF open if you go overseas for extended periods, however during those times you need to have an Enduring Power of Attorney step in and run the fund on your behalf and you can’t actively contribute or directly control the SMSF or its investments.
The other alternatives are closing the fund (wind up) or making it a ‘Small APRA fund’ and having a professional trustee take over.
Having an SMSF may not be a good idea if you foresee that you will live overseas in the future.
Hopefully our podcast and this article has helped you determine whether having an SMSF is appropriate for you and your situation.
If you have any questions or would like to know more, please get in touch.