Self managed super funds (SMSF's) are similar to other super funds as they are designed to help you build your super savings so you can have the lifestyle you want in retirement.
The key difference is that all members of SMSFs are trustees and directly control the fund. They are responsible for the fund’s assets and investments, paying the benefits and ensuring that the fund is compliant.
While SMSFs can mean more control and flexibility over your super savings, they are not for everyone as they require a much higher level of time and attention to administer and manage.
Requirements of an SMSF
- Funds can have up to four members and each member is generally a trustee of the fund.
- The fund must operate for the ‘sole purpose’ of providing benefits to its members upon their retirement.
- No member of the fund can be an employee of another member, unless they are related.
- The trustees/members do not receive any remuneration for their services as a trustee.
- Members/trustees of the SMSF are required to prepare and implement an investment strategy for their fund. This provides a framework and direction for the investment of contributions.
- The fund has wide flexibility in investment choices. Direct property, managed investments and direct shares can all be included in an SMSF portfolio.
The key issue with SMSFs is that members/ trustees are ultimately responsible for ensuring that the SMSF remains compliant with the law. The responsibilities and obligations are numerous so it is important to discuss with your financial adviser whether an SMSF is for you.
Things to consider
Deciding to set up an SMSF is an important decision that you should consider very carefully. The following information outlines some of the advantages and disadvantages of SMSFs.
Benefits of SMSFs
An SMSF gives you control to choose your own investment strategy. As the trustee you are responsible for managing the investment strategy and the underlying investments of the fund.
An SMSF gives you greater flexibility in your choice of investments under certain conditions. Your portfolio can generally include a wide range of investments such as managed funds as well as direct assets such as bonds, shares and property.
Trustees of SMSFs also have greater ability to manage the fees paid by the fund. By selecting and managing your investments carefully, you can keep the fees you pay at a minimum.
SMSFs are treated for tax purposes exactly the same as other superannuation funds. This means they receive the highest concessional tax rate of 15%.
Total wealth management
SMSFs may also provide you with a range of options in terms of estate planning and flexible benefit payments.
Considerations for SMSF's
SMSFs are not suited to everyone so it’s important that you understand the risks as well as the benefits. Your financial adviser will be able to help you decide if an SMSF suits your circumstances.
As the trustee, you are ultimately responsible for the fund. You need to have a good understanding of the rules and regulations for operating an SMSF. It is also important that you keep up to date with the latest developments in investment markets and legislation. Financial professionals such as your adviser or accountant can help you manage your fund.
The administrative requirements of running an SMSF are quite time intensive so you need to ensure that the management of an SMSF will fit into your current lifestyle.
If you are considering setting up an SMSF, you will need to investigate the associated set-up costs and then the ongoing accounting, brokerage and adviser fees. You will also need a sufficient account balance to make it cost effective in the long run.
Speak with a Moneyplan financial planner about whether an SMSF may be the right approach for you.
Source: Russell Investments, July 2011