A self-managed superannuation fund (SMSF) offers control and flexibility not found in any other type of super arrangement. But how do you know when you are ready for an SMSF?
A key deciding factor will be how interested you are in super and investing. Savers who want to focus on building retirement wealth and take control of their super also need to accept the additional responsibility this brings. Taking control of your super can sound like a great idea and many SMSF trustees/members revel in it, but it can also be an administrative burden and introduce risks. There are two broad types of SMSFs: those where the trustees make all the investment decisions and manage the fund’s investment portfolio and those where a financial adviser is engaged to provide investment advice and manage the fund’s portfolio.
The advantage of the trustees making all the investment decisions is that they have full control over the portfolio. But with this comes considerable responsibility and the risk of poor investments being selected.
The advantage of using a financial adviser is that the investment portfolio is professionally managed, making it less likely that rash decisions will be made when markets fall. An adviser can also provide strategic advice on related aspects such as contributions planning and pension payments.
Regardless of whether you manage your own money or have an adviser help you, all SMSFs need annual accounts prepared and an annual audit completed.
The size of your super balance also needs to be taken into account. The amount in super required to justify establishing an SMSF depends on the anticipated cost of running the fund.
As a guide, we believe about $200,000 is required to set up an SMSF for which the trustees make all the investment decisions. This is based on an estimated minimum annual accounts/ audit cost of $2200, which represents 1.1 per cent of the fund value. A balance of about $400,000 is required where a financial adviser is managing the investment portfolio. The financial adviser’s fee is likely to be about 1 per cent p.a., giving a combined compliance/advice fee of about 1.55 per cent p.a.
There are also special circumstances that necessitate a fund member needing the flexibility of an SMSF, such as the purchase of office premises to rent to a related business. No other super fund type can accommodate this.
It’s also worth noting that insurance options are more flexible and can be more cost effective for an SMSF than those available through other super arrangements.
Age is not a major factor in the decision process. Commencing an SMSF may be equally appropriate for a 25-year-old executive as a 65-year-old retiree.