Over the last few years, Self-Managed Super Funds (SMSFs) in Australia have become more popular, as more people are choosing to have greater control and more flexibility over their retirement savings. By establishing an SMSF, investors are able to manage their own super portfolio instead of it being managed by a fund manager. And while there are certainly benefits to this type of investment, it’s vital investors are clear on what the pitfalls are to avoid.

What are Self-Managed Super Funds?

SMSFs are a type of superannuation fund that allows individuals to take charge of their retirement savings. Unlike retail or industry super funds, SMSFs are self-managed, meaning members become trustees and are responsible for making investment decisions and managing the fund's compliance with legal and regulatory requirements.

SMSFs are made up of no more than six members and members need to be trustees of the fund. The sole purpose of the SMSF is to provide retirement benefits as outlined in the Superannuation Industry (Supervision) Act 1993 (SIS Act). Members’ superannuation funds are paid into the SMSF, and they are responsible for investing those funds appropriately. Investors are required to have an investment strategy that considers the risk profiles of all members.

What are the benefits?

Some of the reasons people choose to manage their own superannuation fund include:

• Investment control and greater flexibility: SMSFs provide investors with the freedom to choose and manage their own investment options, while diversification strategies and asset allocation decisions can be tailored to their own preferences and risk appetite.
• Cost-effectiveness and reduced fees: SMSFs often have lower fees compared to retail or industry super funds and, by eliminating unnecessary services or features, allow investors to potentially save on fees.
• Estate planning and tax planning opportunities: By choosing an SMSF, investors may have more control over their estate planning in ensuring their assets are distributed according to their wishes. Furthermore, SMSFs offer tax planning opportunities that minimize tax liabilities and maximize retirement benefits.

What are the pitfalls?

Along with the benefits, there are some pitfalls including:

• The amount of time and effort required: Managing an SMSF requires dedication and time to fulfil the responsibilities of trustees and carry out the administrative tasks. Keeping up with regulatory changes and compliance requirements is essential and demands ongoing effort.
• Risk and responsibility: SMSFs come with investment risks, and losses can occur if investments perform poorly. As trustees of the SMSF, investors bear legal and financial responsibilities, including ensuring compliance with laws and regulations.
• Limited access to compensation and consumer protections: Unlike retail or industry super funds, SMSFs do not have access to government compensation schemes, while consumer protections provided by regulated funds may not apply to SMSFs.

Before deciding to establish an SMSF, it’s vital investors seek professional advice and conduct thorough research. That way they can make informed decisions about whether managing their own super fund aligns with their financial goals and aspirations.

For financial advice tailored to your unique financial situation, or for guidance around establishing and managing a SMSF, contact a Mortgage Express broker today and we’ll connect you with a financial adviser.

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