Provided by Mercer: 14/5/09
Self-managed superannuation funds (SMSF) have flourished in recent years as Australians look to take greater control of their superannuation savings.
The number of SMSFs in Australia quadrupled from 97,000 in 1994 to more than 400,000 in 2009. It seems likely their popularity will continue as, in the current market, many people think they may be able to do better, directly managing their superannuation investments themselves. A SMSF provides more control in the investment of your super savings, but it also involves significant responsibilities. In deciding whether an SMSF is right for you, here are five things to think about.
Are your reasons for establishing an SMSF valid?
If it’s to gain greater control of your investments, your reasons are very valid.
SMSF trustees can manage how their funds are invested and administered, allowing access to investments that aren’t generally available in other superannuation arrangements such as direct investment in real property, alternative investments such as instalment warrants, and a full range of listed securities. However, if it’s solely to save on costs or invest in exotic assets (such as vintage cars or wine), the validity of using an SMSF is questionable.
How much does it cost?
The cost of running an SMSF varies with a key factor being the cost of the professional services (such as accounting, financial advice, tax, audit and legal advice) used. There may also be additional outlays such as life insurance (most super funds provide members with life insurance benefits to a certain level) which you’ll need to cover. And then there’s the cost of your time.
Do you have the time to manage your own fund?
It’s important to remember that, even if you use professional advice and assistance, you are ultimately responsible for all the decisions made. As trustee, you have sole responsibility for adhering to all the laws relating to superannuation, taxation and trust law. There are also significant record keeping and reporting obligations, while funds must be independently audited on an annual basis and a report provided to the ATO. You will also be required to prepare and document your investment strategy, as well as stick to it. The penalty for any breaches can be significant.
Are you an interested investor?
In choosing and reviewing the investment options your super fund invests in, you will need to spend time investigating, understanding and reviewing different types of investments. This will mean reading product disclosure statements and will require an understanding of your own personal drivers, such as the rate of return you are looking for and the amount of risk you are willing to take with your retirement savings.
Is it right for everyone involved?
Consider who will be the members and trustees and what would happen if one were to die or become incapacitated. Often an SMSF is established by a couple – are both people experienced, capable and willing to make decisions and manage the day-to-day administration of the SMSF?
An SMSF can be a very effective and strategic way to manage your superannuation – but it’s not necessarily an easy one. If you’re considering establishing a SMSF (or looking to improve the way you operate an existing one), speak to a licensed or appropriately authorised financial adviser to discuss whether it’s the right strategy for you and, if yes, the steps you should take to put an effective, self-managed strategy in place.
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
