The Superfund Conundrum – Pro’s and Con’s of An SMSF

The number of SMSF’s have been consistently increasing over the five year period June 2013 to June 2018 with the number of SMSF’s rising from 500,923 to 596,225.

This seems to indicate there’s something attractive too many Australians about SMSFs.

That said, it isn’t really for everyone. There may be many articles online touting the benefits of SMSF however we have taken it upon ourselves to inform you that it is not all rosy. There are also risks involved, risk that makes it unsuitable for some people.

Here, we will be looking at some of the benefits as well as the disadvantages of managing an SMSF.

The Advantages of Managing an SMSF

1. Greater Financial Control

Managing your super fund yourself means you don’t have to worry about an external fund manager living a lavish lifestyle with your money or implementing high risk strategies for short term gain.

You are in total control of your super(subject to what is legal allowed), and this give you the power to invest in only the assets classes that you consider worthwhile.

2. Investment Choice

You have the opportunity to select the kind of investment that interests you as after all, you are In control of your super fund. These investments could range from cash deposits to commercial property to residential property and even crypto currency.

As long as it passes the sole-purpose test, is ATO compliant and in-line with your investment strategy there are a lot of investment options at your finger tips.

3. Reduce Fees

This of course is not a “hard and fast” rule. Depending on your current situation and the operating expense ratio of an SMSF, an SMSF could result in less fees (especially if you let CloudSuper manage it, we have low fixed fees for Accounting and Audit).

Find out how to choose the right SMSF accountant.

One thing is for sure, having us manage your SMSF compliance will nearly certainly be significantly more affordable than choosing a conventional accountant and could save you thousand’s of dollars in fees ever year. That’s because we do not charge a percentage of the balance unlike many other service providers. We charge a flat rate and that rate remains the same irrespective of any amount of growth in the value of your super fund.

4. Divide and Conquer

You have the opportunity to set-up your super fund with up to 3 other members, commonly family, spouse or partner. This can help to increase the overall balance of an SMSF, and can open doors for investments with a higher cost barrier to entry. This can also mean the cost per person for SMSF administration is significantly lower if your SMSF provider is like CloudSuper and charges a flat fee per fund and not per person.

The Disadvantages of Managing an SMSF

1. Requires Knowledge or Time (To Learn Knowledge)

It could be a poor decision with negative ramifications to not educate yourself or have sufficient knowledge to manage your superannuation and still operate an SMSF. We all know knowledge is power, and for investing it is no different.

Just like it’s better to go to the back roads or an instructor when your learning to drive a car, learning how to trade with your retirement fund could be a very risky thing to do. We recommend that you consult a licensed or authorised financial adviser if you require any element of financial advice.

2. Time-Consuming

It can be very time consuming to manage an SMSF for numerous reasons.

This can be mitigated by staying organized and being disciplined to ensure all of the SMSF rules and regulations are strictly abided by.

You (as a trustee) of the SMSF would also be responsible for conducting research to find investments that are in-line with your investment strategy and managing the performance of these investments.

Not all investments are created equal in terms of time commitment.

On the more time consuming spectrum, investments commonly purchased by our customers include:

  • Investing in Property

Not only do you have to spend time selecting the property, but you have to get an SMSF loan over the line (which can be difficult), manage the property, manage the tenant and then keep good records of all the expenses so you can provide it to your accountant at the end of the year.

  • Online Trading

This can be extremely time consuming (especially things like Forex) as most people know as it’s possible to lose significant amounts of money in very short periods of time.

  • Cryptocurrency

This can also be extremely time consuming as the markets are extremely volatile and it’s possible again to lose significant amounts of money in very short periods of time.

On the less time consuming spectrum, investments commonly purchased by our customers include:

  • Term Deposits

Term deposits are close to being a set and forget investment. Our clients have found they generally don’t take a huge amount of time to manage.

  • Bank Interest

Some SMSF trustees choose to leave the SMSF money in there SMSFs bank account and let it generate interest on it’s own. This is also generally not very time consuming.

3. Fees

There is typically a set-up cost in establishing your SMSF which can generally be in the $2,000-$3,000 range. CloudSuper does not charge a set-up fee for SMSFs established as Individual or Corporate Trustees.

Aside from the initial set up fee, there are also fees for managing the compliance of the fund i.e. Annual Accounting & Audit Fees.

CloudSuper includes these fees in our flat rate so you don’t have to worry about such fees or any other extra ‘legal’ fees for things like trust deed updates which our competitors like to on-charge.

There is also an annual ATO Supervisory Levy which the ATO imposes on SMSFs and if your running a corporate trustee for your SMSF structure there are Annual ASIC fees.

4. Strict Rules and Regulations

The ATO regulates SMSFs and strict compliance to its laws is required to avoid severe penalties. For this reason, it is of utmost importance that SMSF members ensure their SMSF is always running in a compliant manner.

CloudSuper will provide you an annual compliance report from the auditor as part of our flat rate fee.

In summary, there are major advantages and disadvantages to SMSFs and it is not a decision to take lightly.

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