When do SMSF’s make sense?

When is it a good idea to transfer your superannuation funds into a Self Managed Fund? Is not moving to an SMSF a waste of time? Who should own a self-managed fund?

We’ll answer all of these questions this week. If you have ever wondered if a managed fund was right for you, this episode will hopefully answer your questions.

Let’s begin by covering the basic foundations. Self-Managed Super Funds (SMSF) are legal structures that allow you to manage and save for your retirement. Like regular super funds, any money you hold in them will be preserved until at least the age of 60 and retirement. The end goal is to generate income during retirement.

Six people can be included in a self-managed super fund. Most often, you will have two spouses in the same fund. However, you may also have their children. Although a managed fund may hold the retirement savings of multiple people, each fund member’s balance is recorded and tracked individually. It is always clear in the fund what percentage of the total asset value belongs to each member, even when the money is combined.

The setup of self-managed funds (also known as SMSF) costs around $3,000. The annual audit and tax return are usually around $2,500.

Self-managing a super fund comes with some important responsibilities. As the trustee or controller, you have a legal obligation to ensure that all rules regarding superannuation investments are adhered to.

Self-Managed Super Funds are disproportionately owned by business owners. This may be because business owners have experience running companies, and running an SMSF does not seem like a huge leap. It is also possible that they have a strong accounting relationship, which is crucial to ensuring the fund is managed in compliance. One of the most common uses for SMSFs is that they are only available to business owners. We’ll get into this in a minute.

The ATO regulates Self Managed Super Funds. In March of this year, they reported that 606,000 SMSFs are in Australia with 1,136,000 members. In their report, they noted that 87% of SMSF members were 45 years or older.

In recent years, the growth of Self-Managed Super Funds has slowed down in Australia. The interest in this area grew significantly during and after GFC 2008-2009. Self Self-managed super Funds could borrow money to buy a residential property at a time when share markets were in a bad run. Many SMSFs were set up by people who wanted to invest their retirement funds in real estate instead of stocks.

Some people also use Self Managed Super Funds to purchase direct shares instead of funds. It could be because they were interested in the stock exchange and wanted that level of control or to save money by eliminating the fund manager’s fees.

Use cases that are common today

Self-managed super funds are still a good option for business owners who want to purchase a commercial property. Self-managed super funds are generally prohibited from making any transaction with their members or other related parties. There is an exception for commercial property. A managed fund can buy a warehouse, office, or other commercial property and then lease it to a business owner, who pays rent at the normal commercial rate.

Business owners are attracted to this strategy because they can invest in their business premises as needed and feel confident about it.

You may have put all your eggs in one hat. You might find it difficult to pay rent if your business is going through a rough period. This could put your retirement and livelihood at risk.

Self-managed funds can be used to borrow money to purchase commercial properties, making it possible for them to acquire these properties. Loans are not easy to get, and they often have to be obtained from specialists who can charge high-interest rates.

Self-managed super funds are also a good option for someone with a large sum of money in super who wants to manage it themselves. The SMSF route would be chosen in order to save money by taking on fund management and administration responsibilities.

SMSFs don’t make sense in certain situations.

SMSFs are not cost-effective for retirement savings below $200,000. This is because they require an annual audit and tax return. Many would argue that a managed fund is only cost-effective if you have at least $500,000 in retirement savings.

You can almost certainly find a cheaper and easier way to do this if you’re looking to invest in ETFs or direct shares. Some industry funds offer this option, while Wrap facilities provide a lot of functionality. They even allow you to buy shares in foreign exchanges, such as the United States. The cost of these solutions is usually lower than running your own SMSF. But, more importantly, you don’t have to assume all the risks associated with being a trustee and making a mistake.

As I said earlier, the desire to make residential property investments was once a major driver of Self Managed Super Funds. In most cases, it is best to invest in this way outside the superannuation system. Self Managed Funds are not eligible for loans from the five largest banks. This means that any money borrowed will be at higher rates of interest. The work that you can do to the property will be severely limited. The property can be maintained but not improved. Investors will often want to upgrade the kitchen, add a patio, or make some other improvements. You may even wish to subdivide your block. These improvements are not allowed for self-managed Super Funds properties, where loans were used to purchase the asset. This is almost always the case.

You may also be concerned about the lack of diversification in your retirement savings. Due to the high cost of buying a property, many people who chose the Self Managed Super Fund route invested their retirement funds in one property. It is not a smart move when it comes time to retire.

Another use case that emerged a few decades ago was for people who wanted to invest their retirement savings in crypto. You can probably figure out what happened.

Let’s go back to the questions I asked at the beginning of this episode. When is it a good time to switch to a Self Managed Super Fund (SMSF)? Most people will never.

The logic behind an SMSF does not depend on a specific balance. If you’re a businessman looking to buy a commercial property to run your business, or if you have a large amount of retirement savings and want to be more hands-on, establishing a Self Managed Fund is something you should consider. It goes without saying, of course, that you must also be competent. As a trustee, you have a very important role. Poor investment decisions that result in you outliving the money you have invested would be disastrous.

Who should own a self-managed super fund (SMSF)? An SMSF would be suitable for those who are good with bookkeeping, administration, and investing large amounts of money. They also need to have the time and desire to manage their retirement savings. To make the SMSF cost-effective, they would need retirement savings of at least $200,000 and preferably more.

You should now be able to decide if a managed fund is right for you. Send me an email if you have any questions.

People who have already established a Self-Managed Super Fund tend to keep them because they do not want to be liable for capital gains tax when disposing of assets. My experience at the coalface is that there aren’t a lot of people setting up self-managed super funds these days. In the last decade, we have seen significant improvements in investment management and a reduction in fees. This has reduced the need for SMSF solutions.