Are you ready for an SMSF?

Are you ready for an SMSF?

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. 

 

 

 

DISCLAIMER

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.

 

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Learn more about superannuation

How do I set up an SMSF?

Setting up an SMSF takes more work than registering with an ordinary superannuation fund. 

An SMSF is a type of trust, so if you want to create an SMSF, you first have to create a trust.

To create a trust, you will need trustees, who must sign a trustee declaration. You will also need identifiable beneficiaries and assets for the fund – although these can be as little as a few dollars.

You will also need to create a trust deed, which is a document that lays out the rules of your SMSF. The trust deed must be prepared by a qualified professional and signed by all trustees.

To qualify as an Australian superannuation fund, the SMSF must meet these three criteria:

  • The fund must be established in Australia – or at least one of its assets must be located in Australia
  • The central management and control of the fund must ordinarily be in Australia
  • The fund must have active members who are Australian residents and who hold at least 50 per cent of the fund’s assets – or it must have no active members

Once your SMSF is established and all trustees have signed a trustee declaration, you have 60 days to apply for an Australian Business Number (ABN).

When completing the ABN application, you should ask for a tax file number for your fund. You should also ask for the fund to be regulated by the Australian Taxation Office – otherwise it won’t receive tax concessions.

Your next step is to open a bank account in your fund’s name. This account must be kept separated from the accounts held by the trustees and any related employers.

Your SMSF will also need an electronic service address, so it can receive contributions.

Finally, you will need to create an investment strategy, which explains how your fund will invest its money, and an exit strategy, which explains how and why it would ever close.

Please note that you can pay an adviser to set up your SMSF. You might also want to take the Self-Managed Superannuation Fund Trustee Education Program, which is a free program that has been created by CPA Australia and Chartered Accountants Australia & New Zealand.

What should I know before getting an SMSF?

Four questions to ask yourself before taking out an SMSF include:

  1. Do I have enough superannuation to justify the higher set-up and running costs?
  2. Am I able to handle complicated compliance obligations?
  3. Am I willing to spend lots of time researching investment options?
  4. Do I have the skill to make big financial decisions?

It’s also worth remembering that ordinary superannuation funds usually offer discounted life insurance and disability insurance. These discounts would no longer be available if you decided to manage your own super.

Can I take money out of my superannuation fund?

Superannuation is designed to provide Australians with money in their retirement. The government has strict rules around when people can take that money out of their fund because it wants to prevent people eroding their savings before they reach retirement.

As a general rule, you can only take money out of your superannuation fund when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

That said, you can take money out of your superannuation fund early based on one of these seven special conditions:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

Can I choose a superannuation fund or does my employer choose one for me?

Most people can choose their own superannuation fund. However, you might not have this option if you are a member of certain defined benefit funds or covered by certain industrial agreements. If you don’t choose a superannuation fund, your employer will choose one for you.

How do you open a superannuation account?

Opening a superannuation account is simple. When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You might want to provide your tax file number as well – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

How do you find lost superannuation funds?

Lost superannuation refers to savings in an account that you’ve forgotten about. This can happen if you’ve opened several different accounts over the years while moving from job to job.

You can use your MyGov account to see details of all your superannuation accounts, including any you might have forgotten. Alternatively, you can fill in a ‘Searching for lost super’ form and send it to the Australian Taxation Office, which will then search on your behalf.

What is lost superannuation?

Lost superannuation refers to savings in an account that you’ve forgotten about. This can happen if you’ve opened several different accounts over the years while moving from job to job.

How do I change my superannuation fund?

Changing superannuation funds is a common and straightforward process. You can do it through your MyGov account or by filling out a rollover form and sending it to your new fund. You’ll also have to provide proof of identity.

Can my employer use money from my superannuation account?

No, your employer can’t touch the money that is paid into your superannuation account.

How do you access superannuation?

Accessing your superannuation is a simple administrative procedure – you just ask your fund to pay it. You can access your superannuation in three different ways:

  • Lump sum
  • Account-based pension
  • Part lump sum and part account-based pension

However, please note that your superannuation fund will only be able to make a payout if you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

The preservation age has six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

There are also seven special circumstances under which you can claim your superannuation:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

How do I choose the right superannuation fund?

Different superannuation funds charge different fees, offer different insurances, offer different investment options and have different performance histories.

So you need to ask yourself these four questions when comparing superannuation funds:

  • How many fees would I have to pay and what would they cost?
  • What insurances are available and how much would they cost?
  • What investment options does it offer? How would they match my risk profile and financial needs?
  • How have these investment options performed historically?

When is superannuation payable?

Employers must pay superannuation at least four times per year. The due dates are 28 January, 28 April, 28 July and 28 October.

What are government co-contributions?

A government co-contribution is a bonus payment from the federal government into your superannuation account – but it comes with conditions. First, the government will only make a co-contribution if you make a personal contribution. Second, the government will only contribute a maximum of $500. Third, the government will only make co-contributions for people on low and medium incomes. The Australian Taxation Office will calculation whether you’re entitled to a government co-contribution when you lodge your tax return. The size of any co-contribution depends on the size of your personal contribution and income.

What is a superannuation fund?

A superannuation fund is an institution that is legally allowed to hold and invest your superannuation. There are more than 200 different superannuation funds in Australia. They come in five different types:

  • Retail funds
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Self-managed super funds

Retail funds are usually run by banks or investment companies.

Industry funds were originally designed for workers from a particular industry, but are now open to anyone.

Public sector funds were originally designed for people working for federal or state government departments. Most are still reserved for government employees.

Corporate funds are arranged by employers for their employees.

Self-managed super funds are private superannuation funds that allow people to directly invest their money.