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What are the risks and challenges of an SMSF?

Mark Bristow avatar
Mark Bristow
- 3 min read
What are the risks and challenges of an SMSF?

A Self-Managed Superannuation Fund (SMSF) may sound great on paper, as you get to decide where your retirement savings are invested. However, an SMSF may not be the best choice for every Australian, as they also come with their fair share of potential problems to overcome if you want to get the most out of one. 

SMSFs generally have high set-up and running costs

While most standard superannuation funds have fees that need to be paid, an SMSF may require you to cover additional costs.  

Some of the expenses you’ll need to pay for with an SMSF include:

  • investing
  • accounting
  • auditing
  • tax advice
  • legal advice
  • financial advice

According to MoneySmart, the average operating cost of running an SMSF in 2019 was $6450, while the median cost was $4069.

They come with complicated compliance obligations

An SMSF gives you the flexibility to choose how your superannuation is invested, and may offer certain tax concessions under specific circumstances. But an SMSF also comes with important responsibilities, such as complying with the super and tax laws.

For example, an SMSF can’t be used to get early access to your super, or to buy a holiday home or artwork to decorate your house.

Setting up an SMSF involves establishing an investment strategy that passes the “sole purpose test”, where your fund needs to be maintained for the sole purpose of providing retirement benefits to members and/or their dependents. The fund’s investments must also be separated from the personal or business investments of members, and must be made on a commercial ‘arm’s length’ basis.

There are many other SMSF rules and regulations that need to be followed that are summarised by the Australian Taxation Office (ATO). Their details may be updated regularly, so it’s important to stay up to date to make sure your SMSF is in the clear and isn’t accidentally acting illegally.

It takes a lot of time to research investment options

Because of the ATO’s restrictions, it may be more challenging than you expect to organise investments for your SMSF. As well as researching investments, you’ll also need to set and follow an investment strategy, and organise accounting and record-keeping, and arrange an audit each year by an approved SMSF auditor

According to MoneySmart, SMSF trustees spend, on average, eight hours a month managing an SMSF, which equates to more than 100 hours a year. This is a lot of work compared to having a traditional super account, where the super fund will manage most of the admin.

It can be difficult to make such big financial decisions

When you have an SMSF, you are personally responsible for the fund’s financial decisions. To manage the fund, you may require some specialist financial and legal knowledge.

You can still get assistance from a professional financial adviser, but ultimately the responsibility for the SMSF lies with you. This could put you at risk of potentially losing money or access to insurance through theft, fraud, or simply unsuccessful investments.

Before you open a Self-Managed Super Fund, it’s important to consider all of your superannuation options and decide whether an SMSF will be the best choice to help you reach your financial goals, now and in retirement.

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Product database updated 23 Jul, 2024

This article was reviewed by Personal Finance Editor Peter Terlato before it was published as part of RateCity's Fact Check process.