A self-managed super fund (SMSF) is a private super fund that you manage yourself. SMSFs are different to industry and retail super funds in several ways. Like any investment vehicle, SMSFs come with their own set of advantages and disadvantages.

In this blog we will delve into the pros and cons of SMSFs.

What is an SMSF

A self-managed superannuation fund is a type of superannuation fund that gives individuals greater control over their retirement savings. Unlike traditional super funds, where professional managers make investment decisions on behalf of members, an SMSF is managed by its members. The members are responsible for the fund’s operation and ensuring compliance with regulatory requirements set by the Australian Tax Office (ATO).

An SMSF can have between one and six members. From 1 July 2021, the limit of members in an SMSF was increased to six. This change provides more flexibility for larger families or business partners who wish to manage their retirement savings together.

Pros of an SMSF

1) Control

One of the primary benefits of SMSFs is the ability to have more control over investment decisions and the management of retirement assets. With an SMSF, the investment strategy can be tailored to suit the needs of the members. For example, members can choose to invest in a mix of assets, including shares, property, cash, term deposits and collectibles like art, depending on their risk tolerance and long-term objectives.

2) Investment Flexibility

Traditional super funds offer a limited range of investment options, which are often managed by professional fund managers with a specific investment mandate. In comparison, SMSFs provide a wider range of investment choices, allowing members to diversify their portfolios beyond the standard options.

SMSFs can also provide the option to explore more sophisticated investment strategies, such as borrowing to invest in property.

3) Potential Cost Savings

For some people, the cost of running an SMSF can be lower than an alternative fund. This will depend on the number of members and the fund balance. As all of the members pool their money into the SMSF, they share in paying the fees for the fund too. The costs of managing an SMSF are often fixed and do not increase with the size of the fund. In comparison, standard retail and industry funds may have percentage fees which can result in costs increasing as your balance grows. However, some industry funds do have a cap on administration fees at certain levels.

It is therefore important to review the existing fees carefully when compared to an SMSF as this should be a factor to consider when determining if an SMSF is the right option. A financial advisor with an SMSF accreditation will be able to assist in this comparison.

Cons of an SMSF

1) Administration

Operating an SMSF requires additional time and effort. Trustees have more responsibilities such as ensuring annual financial statements and tax returns are prepared by a professional. They also need to stay informed of changes to superannuation law and ensure that the fund remains compliant with all relevant regulations.

The initial administration burden can be challenging, especially for those with a newly established fund. Mistakes in admin can result in penalties or the fund being deemed non-compliant. As a result, many SMSF trustees choose to engage professional services such as accountants, financial planners, and auditors to assist with these tasks. However, this adds to the cost of running the fund.

2) Investment Risk

SMSF trustees have the responsibility for investment decisions and should have the knowledge, skills, and experience to make informed choices. Unlike traditional super funds, where professional managers handle the investment strategy, SMSF members have full responsibility for the allocations of their investments.

This can be a positive and a negative, on one hand, it allows for more control and strategic investment strategies. On the other hand, it also increases the risk of poor decision-making, which can negatively impact the fund’s returns. Members who lack investment experience may find it challenging to build a diversified portfolio or to respond to changes in market conditions.

3) Costs and Fees

Establishing an SMSF requires an initial upfront cost, which can vary depending on the complexity and level of professional assistance required. In addition to the setup costs, there are ongoing expenses associated with running the fund. These can include accounting, financial planning, and audits.

The starting balance of an SMSF is one of the most important factors when determining if it’s the right decision. Due to the fixed costs, running an SMSF with a smaller balance can be very expensive. The fixed costs can represent a large percentage of the fund’s assets, eroding potential returns. Therefore, it’s important to carefully consider whether the benefits of an SMSF outweigh the cost based on the size and complexity of the fund.

Self-managed super funds offer a range of benefits, including greater control, investment choice, and flexibility. However, these benefits must be weighed up against the potential drawbacks such as increased admin duties, investment risk, and the costs of setting up and running the fund.

Before setting up an SMSF, it’s important to be well-informed about the responsibilities and risks involved. Seeking professional advice can be beneficial to ensure if an SMSF is the right choice for you and your retirement savings.

At Unified Wealth, our team is highly experienced and provides goal-based advice and solutions for a range of super and retirement strategies. We hold an SMSF accreditation and can provide advice on establishing and running an SMSF. We understand that managing your own super can be both rewarding and challenging, and we’re here to help you. Speak to our team today to find out how we can support you on your journey to financial freedom.

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