The Australian Securities and Investment Commission (ASIC) has recently raised concerns about some investors running self-managed superannuation funds (SMSF).
ASIC commissioner Danielle Press said in a statement that some consumers might be focusing on the benefits of running their own super fund and downplaying or not adequately considering the risks.
As ASIC outlines, managing your own super brings with it responsibility, time and effort. Those who have extensive knowledge of financial and legal matters might be able to handle it, but need to be aware of the legal responsibilities.
ASIC also pointed out that the volume of assets in SMSFs now outweigh industry and retail funds in the Australian super system.
So let’s look at SMSFs, including benefits and cautions.
Managing Your SMSF
SMSFs are private superannuation funds regulated by the Australian Taxation Office (ATO). Once you set up the fund, you manage it yourself.
Having an SMSF brings several benefits, including control over the fund because the owner can also be a trustee. SMSFs are ideal for families, partnerships and businesses, because a SMSF can have up to four members.
Your SMSF can be used as a means of growing personal wealth, building a family super fund, or as part of estate planning. You can also borrow money through a SMSF to use for property investment.
So having a SMSF can give you more control over your superannuation investment strategy.
However, there are many considerations to managing an SMSF, so people often seek advice before making any decisions. And investors must be aware that they’re responsible for legal compliance, even with the help of a professional in establishing the fund.
Financial Advisers And SMSFs
While a SMSF can be a way to increase borrowing power, for instance by allowing you to purchase an investment property, there are cautions.
All the members must be trustees and they are responsible for decisions made about the fund, including compliance with relevant laws. Managing it isn’t simple, and there can be severe financial penalties if it isn’t done properly.
ASIC’s review of the SMSF sector found that approximately 90% of financial advice about setting up a SMSF didn’t comply with relevant laws. This could have been for a range of reasons, like seeking advice from someone who wasn’t licenced to provide it. SMSF trustees also reported that running the SMSF took more time than they thought, and was more costly than they thought.
It’s also important to remember that you can’t benefit personally from SMSF funds; they are established to fund your retirement and not provide present-day funds. For instance, you can buy an investment property, but you can’t buy a house with SMSF money and then live in it.
For these reasons, it’s wise to consider ongoing advice in the administration of the fund.
The type of advice may depend on your needs, but it’s important to ensure the SMSF adviser you choose is licensed to provide this type of advice. ASIC’s financial advisers register can provide guidance in choosing a licensed adviser.
Major Considerations Regarding Your SMSF
- A large balance of at least $300,000 is recommended. A lesser balance likely won’t help your financial position.
- There are administrative and compliance obligations and those can be time-consuming.
- They’re not the same as a bank account. There are strict rules governing the use of a SMSF, with guidelines about what you can and can’t do with the money. They are similar to a company, and the trustees are the management team.
The decision to have and manage an SMSF is part of building an overall financial strategy.
Final Thoughts
There are benefits to having a self-managed super fund, such as having more control over retirement savings and more flexibility around investments.
But with those benefits come the responsibility and workload of managing your SMSF, along with the cost of compliance.
It’s a good idea to seek advice from a qualified financial adviser to help you manage and make decisions about your SMSF.
