Many people have considered the idea of running their own Self Managed Super Fund (SMSF) at one stage or another. But there are a few very important things that you need to consider before you make this major financial decision and move your life savings over.
Let’s start with the basics, what is a SMSF?
If you’ve heard of a SMSF you might think it’s not that different from an industry fund like Vision Super. The truth is, the major similarities are that your employer is able to pay into it, it receives subsequent earnings based on your chosen investments, and when it’s time to retire, it will fund your retirement. Once you get a SMSF off the ground, however, you’ll notice there are many responsibilities of managing your own funds compared to having an industry fund do it for you.
In a SMSF, you are ultimately responsible for making sure it is compliant with all the relevant laws and regulations. There are also other issues to consider; there cannot be more than 4 members of the SMSF, there is no default insurance cover, and the administration is reliant on the members (such as accounting, tax and fees).
Where can I invest?
While there is more control on where you invest, with that comes the responsibility of investing wisely. Will your SMSF’s returns rival that of an already established super fund like Vision Super? You will need the necessary financial knowledge and skills to make the right decisions, as well as manage a range of legal obligations.
With an industry fund like Vision Super, you get the best of both worlds – a fund that’s run to benefit members, not to profit shareholders, and a variety of investment options to choose from – without the potential headaches and compliance nightmares that can come with managing your own super.
It’s important to note also, that while you can invest directly into property, you cannot live in the property, nor can your family live in it. Similarly, you cannot buy an investment property for your family to lease from you – it can only be leased by an unrelated third party. The ATO applies this rule to prevent you from directly benefiting from the asset1.
What is required to set up a SMSF?
Amongst other things, when you run your own SMSF you must:
- Be the trustee or director, which imposes important legal obligations on you,
- Have the financial experience and skills to make sound investment decisions,
- Have enough time to research investments and manage the fund,
- Budget for ongoing expenses, such as professional accounting, tax, audit, legal and financial advice, and
- Keep comprehensive records and arrange an annual audit by an approved SMSF auditor2.
Remember, if you decide to set up a SMSF, you will either be a trustee of the fund or a director of the company that is a corporate trustee for the fund. Therefore, you are legally responsible for all the decisions made even if you get help. A professional can provide advice and assistance but you’re ultimately responsible3. Having your super in an industry fund like Vision Super takes the stress and responsibility out of securing your retirement. We do it for you.
What if something goes wrong?
Like other super funds, Vision Super is regulated by the Australian Prudential Regulation Authority (APRA) which means members have protections if something goes wrong. Many of these protections are not available to you if you have a SMSF.
29% of members of a SMSF mistakenly believe they have some sort of protection for fraud according to an ASIC survey4. As a member of Vision Super you may be eligible for financial assistance if loss is suffered as a result of fraud or theft however this is not available to SMSF members.
At Vision Super, and with all APRA-regulated funds, the fund must address member complaints and where the complaint remains unresolved, must offer access to the Australian Financial Complaints Authority (AFCA), which is a free and independent complaints resolution service.
SMSF members must resolve their own complaints, which may require costly legal assistance. Under AFCA, SMSF complaints are not classed as superannuation complaints and are considered under their investments and advice jurisdiction.
Have you looked at your responsibilities?
To run a SMSF it takes time and expertise, not to mention cost. There are establishment costs, operating costs and investment management costs. A recent press release from ASIC urged consumers to question whether SMSFs are right for them, and in doing so, released a fact sheet that will be sent to all newly registered SMSF trustees as of November 2019. The fact sheet lists average fees of running at SMSF at $13,900 per annum, and time spent running a SMSF at 100+ hours per year5.
It’s little wonder that an ASIC report found 32% of people surveyed found running a SMSF to be more expensive than they expected and 38% believed it would be less time consuming4. In fact, this same report found many Australians do not understand fully the risks of SMSFs, or their legal obligations as trustees.
Meanwhile, the Productivity Commission super report found the returns aren’t guaranteed to be any better. SMSFs with balances under $1 million delivered on average returns below larger funds, and that the costs for low-balance SMSFs are higher than for industry funds4, such as Vision Super.
- Control over which assets to invest in
- Ability to manage capital gains tax
- Able to purchase business property
- Control over payment of death benefits
- Requires considerable time and effort and is a long-term commitment
- Penalties for non-compliance
- Expensive for small balances
- Strict rules on acceptable investment assets
To protect members’ superannuation, the ATO regulates SMSFs to ensure they are compliant with all the relevant laws. Failing to comply with these laws may result in action taken by the ATO, which can include:
- Making the SMSF non-complying, whereby the SMSF can suffer serious tax consequences (the SMSF’s total income may be subject to tax at the highest marginal rate, currently up to 45%),
- Penalties of between $1,050 and $12,600, and
- Instigating civil or criminal prosecution proceedings if there is a breach in superannuation law
Is this right for me?
Before setting up a SMSF you need to consider all the options and seek professional advice. There are many professionals who specialise in SMSFs such as financial advisors or tax agents. They can provide advice to help you understand:
- what an SMSF is
- the requirements and costs of setting one up
- your investment options and risks.
Most importantly, they can help you figure out if this type of fund is right for you. If you need more information about your Vision Super account, call us on 1300 300 820 Monday to Friday between 8:30am and 5pm.
3 ATO booklet, “Thinking about self-managed super. Six steps to work out if managing your own super is right for you”
5 ASIC fact sheet, “Self-managed super funds: Are they for you?” https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-277mr-asic-urges-consumers-to-question-whether-smsfs-are-right-for-them/