SMSFs: Are they worth the effort for average investors?

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The option of controlling your own financial destiny in retirement, by setting up a Self-Managed Super Fund (SMSF), appeals to many Australians. There are around 650,000 SMSFs operating in Australia, with over one million members and estimated assets of more than $1 trillion. But just because it’s a popular choice doesn’t necessarily make it the best fit for you. Before you go down this path, weigh up the positive benefits against the downsides.

Positive benefits of SMSFs

Full investment control

Retail and industry super funds tend to concentrate on Australian and international shares, and to a lesser extent on property and infrastructure funds and fixed interest. In an SMSF you could decide on a similar investment spread, or add term deposits, collectibles, your own business premises, and even cryptocurrency.

Flexible tax planning

An SMSF offers the opportunity to maximise the tax benefits of capital gains timing and pension-phase income streams, including full refund of franking credits.

Lower cost potential

SMSF running costs (set up costs, ATO supervisory levy, accounting and audit fees, etc.) are fixed. Once you have a sizeable balance in your fund – say $250,000 plus – the cost becomes more competitive than the ‘percentage of assets’ fee typically charged by retail super funds.

Estate planning

SMSF trustees (usually the members) decide how death benefits are paid, usually simplifying and speeding up the process, and allowing timing and tax outcomes to be tailored. Succession planning can be facilitated and assets kept in the fund across generations by having adult children join the SMSF.

Downsides of SMSFs

Time, effort and know-how needed

The average person is not an investment guru. SMSF trustees are responsible for the fund’s investment strategy, and poor investment choices come with the risk that values can decline as well as increase. Managing the fund also involves compliance and record-keeping.

Responsibility and liability

Trustees are also personally and legally liable for all decisions, and the consequences of any mistakes.

Higher cost potential

The fixed costs already described can become a burden if the fund’s balance languishes below $250,000.

Sticking to the rules

SMSFs are supervised by the ATO and must follow strict rules. Breach those rules – even if it’s a genuinely unintentional mistake – and you could be looking at steep fines, trustee disqualification and loss of concessional tax status.

The bottom line: Is it worth it?

If your current super balance is less than $250,000, and you’re happy with the investment options and performance of your industry or retail fund, you may not gain much from an SMSF beyond the burdens of decision-making, paperwork and compliance.

But if you’re financially literate, have some knowledge of investments, and have at least $250,000 (preferably more) in super, the time and effort required to manage an SMSF could be worth it, especially if you want to invest in direct property rather than a real estate investment trust (REIT).

Consult a financial advisor

Before you make your decision about whether an SMSF is right for you, speak with a financial advisor. RS has a team dedicated to managing SMSFs. They can help you evaluate the costs, responsibilities and any potential benefits that apply to your situation.