There are many benefits to establishing your own superannuation fund but it also comes with a commitment of time and energy. There are also some pitfalls that you should be aware of. Super funds are maintained for the sole purpose of providing retirement benefits. They are not for subsidising lifestyles or providing loans to members and their relatives. There are strong penalties for breaching the rules.
Sometimes people look at their annual super fund statement and say to themselves “I could do better than that” without realising how difficult and time-consuming the process can be.
Notwithstanding this we list below some of the benefits in setting up your own SMSF.
Control. You decide what assets to buy and when to buy them. You also decide when to sell assets. Your fund must have an articulated strategy that you follow. This strategy should be reviewed regularly.
Flexibility. You control the asset mix in your fund and can change this as desired. You have the flexibility to hold direct shares, fixed income, cash and in some cases (subject to strict rules) direct property. When reaching retirement age a SMSF offers great flexibility in Transition-to-Retirement income streams and pension arrangements.
Pooling. Your fund can have up to four members that allows you to pool assets and buy more expensive assets. Having more members can be more cost efficient to run.
Tax advantages. There may be tax advantages in running your own fund, particularly in relation to timing and estate planning.
Business owners. Business owners often do not have the ability to join a company scheme and need to provide for their own retirement away from the everyday risk in running their business. You may be able to include some business assets inside the fund which could provide asset protection, tax effectiveness and succession planning.
Cut costs. It is generally perceived that it is only worth running a SMSF if the balance is above $200,000 but this may not always be the case. Certainly if the fund is above that amount there could be considerable cost savings as the administration costs are relatively fixed.
What are some of the pitfalls of a SMSF?
Time. Running a SMSF can be very time consuming. From devising and monitoring investment strategy to making investments and managing the paperwork from dividends, interest and capital gains.
Risk. A trustee of a fund must stay abreast of the current legislation and arrange for accounting and annual audits of the fund. Penalties for breaches of the legislation can be onerous.
Lack of knowledge. Be honest about your ability to learn about the different asset classes and gain proper investment diversification. Many funds are very poorly diversified and hold a narrow spread of investments.
Short term thinking. A SMSF is for your retirement. People are living much longer and retirement funds must last a very long time so it is incumbent upon the trustee of the fund to ensure the investment strategy will provide long term security and look beyond current market volatility.
Dominant trustee. If your fund is a multi-member fund be wary about leaving the investment making decisions to one member. Each member of your fund is responsible for ensuring compliance with regulations and for investment strategy and it is a mistake to leave control to one member even it is a trusted family member.
These are just some of the benefits and pitfalls of establishing your own SMSF. There are others and it is always best to seek professional advice before committing to setting up a fund.
More information can be found here.