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Self Managed Superannuation - Yes or No? - 8/03/2010

With superannuation savings in Australian now exceeding $1 trillion dollars it is no surprise to see that many people are taking control and forming their own Self Managed Superannuation Fund (SMSF). Deciding to set-up an SMSF is an important decision that you should consider very carefully and the following information seeks to outline some of the advantages and disadvantages of SMSF's.

An SMSF is a fund with less than 5 members and generally each member is a Trustee of the fund. This may be either individually, or as a Director of the Trustee Company. An SMSF must operate for the "sole purpose" of providing benefits to its members upon retirement and the Trustees of the SMSF are required to prepare and implement an investment strategy for their fund. This provides a framework and direction for the investment of contributions and of the established account balance.

SMSF's have wide flexibility and investment choice and for example can invest in direct property, managed investments, cash and listed shares. At the end of the day, the Trustees are ultimately responsible for ensuring that the SMSF remains compliant with the law and in our experience, if a client is suited to an SMSF, the tax planning and operational advantages mean that the small amount of additional compliance work is generally welcomed. However, each individual needs to assess for themselves the suitability of a Self Managed Superannuation Fund and the following table tries to summarise some of the key issues. As always, in order to make smart decisions, specific individual advice is vital.

Advantages
 
Greater control
  • An SMSF gives greater control over investment strategy.
  • The control over investment choice provides greater opportunity to create a superannuation portfolio that meets the specific needs of the members.
Investment choice
  • An SMSF portfolio can generally include a wide range of investments such as managed funds as well as direct assets such as bonds and shares.
  • There are also a number of restrictions in regards – discuss this with Richard O'Brien from Optima Wealth.
Costs
  • By selecting and managing investments carefully, you can keep the fees you pay at a minimum.
  • As the fund balance grows the fees may reduce as a percentage of funds invested.
Tax efficiency
  • SMSFs are treated for tax purposes exactly the same as all superannuation funds which is at the highest concessional rate of 15%.
Total wealth management
  • SMSFs may also provide a range of options in terms of estate planning and flexible benefit payments.
Disadvantages
 
Suitability
  • SMSFs are not suited to everyone.
  • Understand the risks and benefits.
Responsibility
  • Need to understand the rules and regulations for operating an SMSF.
  • Also need to be aware of the ongoing legislation changes and how these changes impact the fund.
  • Significant penalties that apply to trustees who are found guilty of mismanaging an SMSF.
Administration
  • Trustee are required to maintain the records of the fund, meet all the reporting requirements and file and lodge tax returns.
Costs
  • Unless there is a specific purpose SMSFs are generally not suited to small investment account balances as they are not cost effective.
  • Operating a SMSF has many fixed costs (e.g. audit and accounting fees) which do not necessarily relate to the account balance.