8 things to consider before starting an SMSF

Being hands on with their super investment decisions is increasingly appealing for Australians, with around $595 billion currently being managed by nearly 600,000 self-managed super funds (SMSFs)¹.

Self-managed super gives you ultimate control over your retirement nest egg. You decide the types of assets you'll invest in, you create and manage the investment strategy and you control your costs.

A SMSF can have a maximum of four members, all of who are trustees responsible for running the fund, investing assets and paying benefits. The most common set-up is a ‘husband and wife’ fund with two members².

But before you rush to DIY super, there are some significant administrative and compliance requirements to consider – and you need to be confident you can make and manage your own investment strategy to provide a sustainable retirement income in the future.

Here are a few things to consider first.

The case for an SMSF

1. Flexibility

Perhaps the biggest appeal of setting up a SMSF is that it gives you unique control over your investment choices and asset allocation. You can decide how much risk you’re comfortable with and quickly adjust your portfolios as markets change.

As well as local and international shares, bonds, exchange traded funds (ETFs) and managed funds, you can also invest directly in property.

2. Pooling assets

SMSFs can be a great way for members of one family to pool their superannuation balances together for greater investment power.

For example, a husband and wife and their two adult children might combine their super balances to purchase a property outright without borrowing.

The administration costs of a SMSF might also be potentially lower per person when assets are pooled.

3. Borrowing to invest

SMSFs can borrow to purchase residential or commercial property or a parcel of shares. This can help you purchase assets that normally would have been out of reach.

However, whether you’re borrowing for a property investment or shares, you must use a limited recourse borrowing arrangement (LRBA) to protect the rest of your SMSF assets. This can involve significant costs and ongoing compliance fees, which could potentially reduce the balance of your retirement savings.

Any excess franking credits can offset other taxes, such as contributions and investment tax, and reduce the total tax you pay.

SMSF risks and challenges

5. Costs

Many SMSF investors believe they’ll pay less in fees if they DIY, but this is not always the case. If you choose investments wisely and keep transactions to a minimum, there is the potential to reduce ongoing fees compared to some industry or retail funds.

However, SMSFs with balances of less than $250,000⁵ may not be as cost-effective – and reports indicate they may also not be performing as well as hoped.

So if you’re mainly interested in SMSFs because you’ll have more choice over your investments, it’s worth taking another look at retail and industry super funds – many have increased their investment options and will let you set your own risk profile.

6. Compliance

The buck really does stop with you when it comes to managing the administration and compliance of your SMSF. Your SMSF fund must be professionally audited every year.

A compliance audit assesses its administration, ensuring compliance with super rules. A financial audit looks at how and where you have invested your super funds to ensure there are no illegal or fraudulent transactions.

As part of your SMSF investment strategy, trustees must also consider the life, TPD and trauma insurance needs of fund members.

If you breach your obligations you could face penalties from the ATO, starting with fines at the lower end or a non-compliance ruling for more serious breaches.

More SMSF considerations

7. Pension planning

Just as with other super funds, SMSF members can transition from accumulation phase to pension phase and start an income stream when they get close to retirement so they can scale back on work if they wish.

If you’re receiving a retirement income stream you might also be eligible for tax deductions, including the Exempt Current Pension Income (ECPI). This is available only to SMSF members in pension phase and has the potential to allow the fund to pay little or no tax. This is expected to be more limited after the proposed Federal Budget changes are introduced, and it’s worth seeking tax advice as contributions and rollovers might affect your fund's ECPI.

8. Estate planning

A common misconception with SMSFs is that when you die your funds will be distributed in accordance with your will to your nominated beneficiaries.

But the payment of such benefits is actually done in accordance with the governing rules of the fund, not the terms of a legal will.

Make sure you complete a death benefit nomination that instructs the trustee to pay your entitlements to certain dependents.

If your legal personal representative is nominated as the beneficiary of your death benefits, your super will be distributed in accordance with your will.

Is an SMSF right for you?

As you can see, self-managed super will not suit everyone.

It takes time and resources to manage and run a fund, and requires expertise to make investment choices. Plus there are onerous legal, tax and compliance responsibilities, with potential liabilities.

How you manage your super is an important decision for your future – and at Citibank, we believe it needs to be seen as a core part of your overall wealth management strategy.