Superannuation is the payment made regularly to a fund which can be accessed during retirement. Though only a small percentage of your income is contributed to your super fund every pay cycle, this adds up over time to create a nest egg by the time you reach retirement.
How much superannuation you need to retire depends on the kind of retirement lifestyle you have in mind, but what is clear is that the more you have in your superannuation fund, the more financially comfortable your retirement should be.
This is why some Australians choose to make voluntary super contributions on top of the minimum of 9.5 per cent of total income contributed to their superannuation fund by their employer.
The basics of self-managed superannuation funds
Self-managed super funds are similar to super funds managed by financial institutions and professional investment managers in that they are funds where you keep, and from which you can invest, your savings.
The main difference, however, is that self-managed super funds are not managed by professional investment managers – instead, they are private superannuation funds which are regulated by the ATO and managed independently by you.
If you opt to set up a self-managed super fund, you are responsible for all decisions relating to the fund, and are expected to be compliant with the laws governing super funds. Self-managed super funds allow for up to four members who must all be trustees, and the fund’s sole purpose must be to providing for the retirement of members.
Here, in the words of ASIC, the financial services regulator, is what you must do if you run a self-managed super fund:
- Carry out the role of trustee or director, which imposes important legal obligations on you
- Set and follow an investment strategy that is appropriate for your risk tolerance and is likely to meet your retirement needs
- Have the financial experience and skills to make sound investment decisions
- Have enough time to research investments and manage the fund
- Budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice
- Keep comprehensive records and arrange an annual audit by an approved SMSF auditor
- Organise insurance, including income protection and total and permanent disability cover for super fund members
- Use the money only to provide retirement benefits
Should I start a self-managed super fund?
It is recommended you conduct thorough research, evaluate your financial position and seek professional advice before committing to starting a self-managed super fund.
Maintaining a self-managed super fund is likely to require a lot of time and specific financial knowledge and skills, so it might be beneficial to speak to professionals before setting up a self-managed super fund.
They might be able to help you consider the pros and cons of running a self-managed super fund, guide you through the administration requirements and assist with investment decisions as well.
The right professionals
As with most financial decisions, working with the right professionals could be beneficial to you and all trustees. Professionals you approach could include:
- An accountant, for assistance with the fund’s accounts and operating statements
- A tax agent, for assistance with logging returns and tax advice
- A fund administrator, for assistance with the running of your fund
- A legal practitioner, for legal advice and assistance with your fund’s trust deed.
- A financial adviser, for assistance with preparing and executing investment strategies.
It’s important to note that even if you choose to approach the above professionals for help, you will still be responsible for ensuring all tasks are completed correctly and adhere to legislation surrounding self-managed super funds.
Setting up a self-managed super fund
According to the Australian Taxation Office (ATO), there a several steps that must be taken when setting up a self-managed super fund. Appointing professionals for assistance are among the most crucial. Once this has been done, the following steps should be taken:
- Choosing individual trustees or a corporate trustee: Self-managed super funds can have up to four individual trustees, or a company acting as a trustee. Costs, requirements and ownership of assets will differ for each of the above options.
- Creating the trust and trust deed: The trust deed is the legally binding document which details the arrangements relating to the trust and its beneficiaries, and how the fund is operated. It is a legal document, so it must be prepared by someone who is qualified to do so, and must be agreed upon and signed by all trustees.
- Appointing your trustees: All trustees must submit their consent in writing, and sign a trustee declaration which provides confirmation of understanding of all associated duties and responsibilities. Eligibility criteria applies to anyone hoping to be a trustee.
- Checking your fund is an Australian super fund: It must be so for the entire financial year to be a complying super fund. If this is not the case, associated assents and income will be taxed at the highest marginal tax rate.
- Registering your fund: Your self-managed super fund must be registered with the ATO. During the registration process, you can apply for a TFN, ABN and register for GST if you feel necessary.
- Setting up a bank account for your fund: This is necessary to pay the fund’s expenses and liabilities.
Though it could be tempting to start making investments right away, preparing an investment strategy for your self-managed super fund could be beneficial to you and all trustees in the long run.
This strategy should be reviewed regularly and amended to suit changes in income, personal circumstances, diversification plans, the liquidity of the fund’s assets and the find’s ability to pay benefits when members reach retirement.
Importantly, the sole purpose test must be met for self-managed super funds to be eligible for the tax concessions generally available to super funds. That is, the fund must be maintained for the sole purpose of being used during the retirement of the member or members, and investments made should reflect this purpose.
The ATO does specify some restrictions to investments, such as:
- The purchase and sale price of assets must reflect market value
- The fund cannot borrow money (except in certain limited circumstances)
- Assets cannot be bought from, and money cannot be loaned to, fund members (except in certain limited circumstances)
How to close a self-managed super fund
Requirements specified in the trust deed will have to be met and benefits must be dealt with before closing a self-managed super fund.
Once this is done, appointing an SMSF auditor is recommended, to complete the final audit for the fund.
Then, the final annual return should be lodged, and outstanding tax and expected liabilities settled before closing the fund’s bank account and winding up the self-managed super fund.
Pros and cons
Setting up a self-managed super fund will give your more control over your investments and how you buy and sell assets, giving you the chance to try to outperform traditional superannuation funds.
That being said, they generally involve high set-up costs and annual running expenses, so a large superannuation balance would be necessary for the fund to be cost-effective. Also, they require a level of financial expertise that a lot of people don’t have.
If you feel a self-managed super fund isn’t the best option for you, consider opting for an industry super fund or one managed by a financial institution or private company.