It’s not uncommon for people to leave their super contributions in the hands of the ‘professionals’ - the giant industry and retail super funds (APRA super funds) that take up the majority of the superannuation sector. But if you aren’t happy with how your super fund is performing, or you want more control over your financial future, you have the option of running your own self-managed super fund (SMSF).
So, to address the initial question: can I manage my own superannuation? The answer is - yes, you can. However, running an SMSF - especially by yourself without professional help - can be a lot of work, and shouldn’t be something taken lightly.
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What is an SMSF?
An SMSF is a private super fund that you manage yourself. Unlike an APRA super fund, SMSF members are also trustees. This means they are completely in control of the super fund, including how it is run on the day-to-day scale as well as its overall investment strategy. However, with great power comes great responsibility, which we’ll get into.
Typically, people that opt for an SMSF over an APRA super fund are looking to take control of their finances, and want to invest their money wherever they see most appropriate. If you’re thinking about it, you might have financial and legal knowledge already under your belt (if not, you’ll need to get some). After all, SMSFs can be hard work. On average, people spend more than 100 hours a year maintaining and running their SMSFs. Plus, the amount of time and potentially money it takes to establish and run an SMSF is no joke.
In terms of size, SMSFs can have no more than six members. Typically, SMSFs have two or more members, but single-member funds are also pretty common. No matter its size, you get to have a say in where and how your money is invested in different places.
How does an SMSF work?
SMSFs to the average Joe look pretty complicated. From setting it up to the day-to-day operating jobs, there is no shortage of tasks you’ll need to stay on top of. It’s for this reason that ASIC’s Moneysmart recommends you don’t set up an SMSF unless you are 100% committed and understand what’s involved.
To give you a brief rundown on how running an SMSF works (we’ll get to setting up in a moment), here’s a rundown on the tasks you’ll be responsible for if you opt for an SMSF over an APRA super fund.
Once your SMSF has been set up, you’ll need to get a few things sorted straight off the bat. You’ll need to rollover your balance from your existing super fund into your SMSF. After this, you’ll need to organise for your employer to start paying your super contributions into your newly nominated fund.
From here, your SMSF needs to start accepting contributions within limits. Contribution caps, which are how much you’re allowed to deposit into your super account, are reviewed yearly. So if you or any other fund member/s want to make additional contributions, you’ll need to make sure they’re within the current limits.
Then, you need to invest your money following your investment strategy (while following all the super laws and regulations), as well as regularly review said investment strategy. Another task you’ll need to handle is maintaining records for up to 10 years.
Clearly, there’s a lot involved. But it actually doesn’t end there. Once a year, you also need to organise the following:
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Having assets valued
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Preparing accounts and financial statements
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Appointing an SMSF auditor
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Lodging the annual return
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Paying any tax that’s due
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Paying the SMSF levy
You might have read the section above and thought, “why would anyone want to start up an SMSF? They sound like so much work!” Well, they are a lot of work, but there are pros and cons to having an SMSF instead of an APRA super fund. Plus, there are professionals that can basically help sort out the paper work for you… for a cost of course. Otherwise, who would bother putting in all the work involved in running one?
Pros of an SMSF
There are a few distinct benefits of self-managing your super.
Control and flexibility
One of the main pros of running an SMSF, as mentioned, is the control you have in making investment choices. When you set up your investment strategy, you get to decide how aggressive/conservative you want to be. You can choose to invest in shares, cash, or even commercial property, or even collectables such as rare artwork. Unlike an APRA super fund, you have the power to decide where, when, and how your money is invested.
Management and pooled assets
With power comes responsibility. Since you’re in control of all the operations of your super fund, you’re responsible for all the choices you’re making. Some might see this as a con, but it can also be a bonus. If you see something isn’t working, you’re responsible for deciding whether to stick it out or try a different strategy. You can review the decisions of other trustees, ensuring you all agree and are happy with the funds' performance.
By having other trustees in the fund, this allows you to effectively pool together your super. This can drive further investment potential, and after a certain point, the value of assets held in the fund may work out to be more cost effective in the long run than having it in an APRA fund.
Tax benefits
Lastly, there are quite a few notable tax benefits. Mainly, you pay less tax on your contributions and earnings. In the accumulation phase, tax on investment income is capped at 15%, while in the pension phase there is no tax payable, not even capital gains tax. You can also claim certain tax deductions that apply to you, and there are quite a few SMSF tax benefits to sift through.
Cons of an SMSF
With the pros also come the cons, which should both be equally considered.
Time
Obviously, managing a SMSF takes time. As mentioned, the average trustee spends more than 100 hours yearly managing their SMSF, and setting one up is an additional time consuming task.
Cost
Running an SMSF also takes money. In 2019, the average cost to run an SMSF came in at $6,450. A few common ongoing costs you’ll need to cover include investing, accounting, auditing, tax advice, legal advice, and financial advice. While you can minimise costs by managing everything yourself, instead of a professional SMSF service, this obviously adds to your time. You’ll have to weigh up which matters more - cost or time.
Compliance and legal hoops
As we mentioned, you’ll also need to know how to properly run an SMSF. Running a compliant SMSF is challenging and requires both legal and financial knowledge. The purpose of running an SMSF needs to solely be creating retirement funds, and cannot crossover into your personal or business ventures. You need to understand all the relevant super, investing, and tax laws and regulations under which your SMSF operates.
Failure to properly run your SMSF will come with both financial and legal consequences, too. For example, you could be slapped with a 45% tax rate, rather than the concessional 15% tax rate. There are also penalty units that apply for failure to comply with certain rules.
Setting up an SMSF: A brief rundown
If you’ve decided the benefits outweigh the drawbacks, your next question might be - “how do I set one up?” There are quite a few tasks involved, but we’ll briefly run you through how to set up an SMSF.
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There are two types of SMSF structures: a corporate trustee structure or an individual trustee structure. Pick your structure, plus how many members will be joining you, and go from there.
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Next, you’ll need to create the trust deed. This dictates how the fund will be run, who is allowed to join the future, and more.
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After this, you’ll need to apply for an Australian Business Number (ABN).
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Then, you’ll need to set up an SMSF savings account to accept member contributions.
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Once you have the account ready, you’ll need to arrange the super contribution system for your employer to pay contributions through.
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Next up, you’ll need to create your investment strategy. In a nutshell, this strategy will dictate how and why you’re investing your money the way you’re investing it.
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Additionally, you’ll need to create an exit strategy, just in case something happens and you need a way out of your SMSF.
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Lastly, though not vital, is auditing. Every year, you’ll need an independent auditor to complete their audit of your SMSF. Getting this out of the way can save the stress of trying to find one come audit time.
Should you switch from an APRA super fund to an SMSF?
When it comes time to choose - sticking with your APRA super fund or switching to an SMSF - it will ultimately come down to you.
If you want to be more in control of your retirement funds, have legal and financial knowledge already behind you, and you’re willing to put in the time and money it takes to run a successful SMSF, then you might decide it’s the right move for you.
If it all just sounds like too much work, that’s okay too. There’s a reason the majority of people have APRA super funds - running an SMSF isn’t easy! It takes time, patience, knowledge, and money (to name a few).
It will be a big decision if you decide to scrap your APRA super fund to start an SMSF - and there are risks involved. According to Moneysmart, if your super balance is more than $500,000, it’s possible your returns will compete with an industry or retail super fund, while working out to be more cost effective.
At the end of the day, deciding whether to switch to an SMSF is completely up to you. If you’re not sure whether an SMSF is right for you, you might want to consider speaking with a financial adviser.
Image by Towfiqu Barbhuiya on Unsplash
Brooke Cooper
Rachel Horan
