What to do to get the most out of your fund.
If you already have an SMSF or have gone through the full range of considerations and responsibilities and plan to set one up, here are 20 quick tips to help you get the most out of it and to help avoid obstacles that can bogged you down in complicated and time-consuming fixes later on:
- Having an SMSF is the one time it is probably OK to have sky-high membership standards. Removing members from an SMSF can be complicated and takes quite a bit of time and paperwork, so think carefully about who you allow in your fund.
- When establishing an SMSF, create a special-purpose company to act as the corporate trustee. The company should not operate any business or have other duties. A corporate trustee saves a lot of time and hassle should you need to change trustees later, compared to individuals acting as trustees.
- Use a legal practitioner or reputable deed provider to draw up the trust deed. A well-drafted deed avoids many future problems.
- Trustees who are on the same page around their SMSF philosophy usually find managing the fund less complex. They tend to have a deeper discussion during the annual investment strategy review, using it as an opportunity to assess the performance of investments against expectations and to consider the outlook and what adjustments may be beneficial.
- Understanding the principle of false economy is critical to managing the administrative and reporting requirements of an SMSF. Engaging professional guidance and advice on complex issues and big changes is likely to save you money in the long term.
- Diversify, diversify, diversify. This is critical to managing volatility and improve returns over the long term. Given the importance of diversification to the future of your retirement balance, it is a big focus of the regulator. With the evolution in listed investments such as Exchange Traded Funds, including smart -beta ETFs, broad diversification is now more accessible for everyday investors.
- Paperwork must be in tip-top order. For example, all requests from an SMSF member to the trustee, including to withdraw a lump sum or start a pension, must be documented, signed, actioned and saved.
- Even SMSF members can have a lost super account. Check your my.gov.au account to find any and if appropriate roll them into your SMSF.
- The ATO does not like tardy trustees. Lodgement of annual returns by the ATO’s deadlines can avoid a lot of hassle.
- Pensions have minimum annual drawdowns. If not met on time, the pension account loses the favourable status of “tax-free earnings in the account” for the full financial year. Keeping three years of pension payments in cash may help fund withdrawals throughout a range of market conditions and avoid having to sell assets at low prices.
- Do not let old insurance cover lapse unintentionally. Getting personal insurance approved without exclusions is very difficult, particularly if you are over 50. Maintaining insurance in old super accounts is a common solution, but 2019 rule changes mean insurance held in super may lapse if the super account becomes inactive.
- Know your bank accounts. If your SMSF bank account is held with the same bank as your personal or business banking accounts, be careful with internet banking so you do not inadvertently transfer money out of, or into, the wrong one.
- Do not underestimate the importance of an enduring power of attorney. If a trustee loses capacity and no valid document exists, your SMSF could end up in a stalemate situation.
- Work out your SMSF succession plan. If you need some help with your trustee duties at some point, which professional will you engage for what requirement? If you cannot fulfil your trustee duties because of incapacity, does your nominated enduring power of attorney understand their role and what your wishes are for ongoing management of the SMSF?
- You can run a single-member SMSF. If your spouse does not have the same investment approach or philosophy, a joint SMSF may not be suitable. You can each have your own SMSF, or choose from the many APRA-regulated super funds on offer.
- Living overseas for extended periods can create major difficulties for SMSF trustees. If you are considering an overseas posting or relocation, get advice from a well-qualified professional experienced with SMSF residency requirements well before you leave the country.
- SMSFs can invest in residential property. They can even borrow money to do this. But it is expensive, complex and unless you have a very large fund is unlikely to stack up. It is also hard to get enough diversification in the fund by retirement. From a tax perspective, negative gearing may be more attractive.
- Adding your adult children into the SMSF can be beneficial for families that have a close relationship, communicate well and want to operate their finances as a family unit. But not all families have, or desire, this level of interdependence. Consider your situation and refer back to tip 1.
- Keep track of current-year contribution limits and what you have put into super each year. With almost countless changes to contribution rules, it is easy to go over the limit and potentially face excess contributions tax.
- Even after retirement, be careful what you take out of your superannuation fund, including in the event of your spouse passing away. It can be very hard to get money into super once you reach age 65, or hold more than $1.6 million.
In summary, many people are attracted to an SMSF because of the additional flexibility it can provide in how you structure and manage your retirement planning. But taking advantage of that additional flexibility can mean an increase in complexity via compliance, paperwork and administrative requirements.
Getting personal advice that helps you understand the benefits and costs specific to your situation can help you to work through the decision process and consider all alternatives.