In keeping with many Aussies' can-do spirit, self-managed super funds (SMSF) have become more popular than ever.
In December of last year, the Australian Taxation Office (ATO) revealed that SMSFs now account for almost one third of the $1.9 trillion total super assets in Australia, having increased by 29 percent over the five years to 30 June 2014. It seems more and more people are learning first-hand the advantages of an SMSF over regular super funds.
But starting and running your own SMSF like these intrepid super-men and women isn't as simple as declaring your intention to do so. Even apart from the complex process of establishing a fund, not everyone is suited to running an SMSF. Self-managed fund trustees need to have particular characteristics if they hope to be successful.
These are a few of the questions you should ask yourself before you even start drafting a trust deed.
Do you have the funds?
SMSFs come with a plethora of fees and costs: Advisors, the annual audit, accounting expenses and set up costs, just to name a few. All of this will take away from your retirement savings in small doses. It's therefore a rule of thumb that anyone hoping to run an SMSF has around $200,000 sitting in their fund at the very least.
Indeed, according to the Financial Services Council Superannuation Fees Report for 2013, the highest proportion of funds in 2011-12 (25.6 percent) had assets worth between $200,000 and $500,000. The next highest share (23.4 percent) had funds sized between $500,000 and $1 million.
Do you know what it takes to be a trustee?
Taking the reins of your superannuation fund is a big responsibility. Being a trustee means you have to take a leading role in all sorts of tasks whose completion you might otherwise take for granted in a regular super fund. This means everything from carrying out admin and end of financial year accounting, to creating an investment strategy and choosing how to invest your super monies. You therefore have to be relatively experienced in investing, or at least have the money to pay for expert advice.
You should also bear in mind the fact that being a trustee means the ultimate responsibility for making sure your fund complies with Australian superannuation law lies with you. It's you, not someone else, who will receive a letter from the ATO or even be fined if you run afoul of the rules. As such, you have to be extra careful, as there are many seemingly small details that can get you in trouble. For instance, fund assets have to be in the appropriate name. There are also strict rules about borrowing or lending through an SMSF.
Do you have the time?
This extra responsibility doesn't only put more onus on you to make sure you get the details right. It also means a greater share of your day spent on managing your SMSF, reviewing your investments and playing catch-up with admin work. If you already have a job that monopolises a lot of your hours, or other commitments that leave you time-poor, it can be hard to balance this with the demands of an SMSF.
This doesn't necessarily mean an SMSF is out of the question for you. You can reduce the time-burden of running a fund by hiring professionals to assist you in the task. For instance, an accountant can help you with arranging your end of financial year accounts, while a professional administrator can help you with the day-to-day minutia involved in running the fund.
Is an SMSF the answer?
Finally, if it's greater choice and freedom you're after, an SMSF is not your only option. The regular superannuation in Australia[SR2] might have you covered. There are many funds out there that let you take a stronger hand in choosing where to put your money, and your mix of investments.
If you're simply not happy with your current super fund, then changing to an SMSF may be an overly dramatic option. In this situation, it may be more beneficial to firstly compare other super providers and see which ones offer the best deals when it comes to fees, flexibility, performance and other considerations important to you.
Advice contained in this article is general in nature and not specific to your particular circumstances. Before making an investment decision you should consider your own financial situation and the relevant Product Disclosure Statement/s. We also recommend you seek advice about your own particular circumstances from a licensed financial adviser.