How to set up an SMSF

Photo of Gemma Dale By Gemma Dale

min read

For those with sufficient savings, self-managed superannuation funds (SMSFs) are a cost-effective option for managing wealth for and in retirement.

Although the establishment of new SMSFs peaked in 2012, more than 32,000 new funds were set up in 2015, representing about 60,000 new trustees. The process of establishing a fund may seem intimidating, but there is a checklist of considerations that can help determine whether an SMSF is right for you and how to go about setting one up.

The decision to set up an SMSF is not one to take lightly. Generally trustees are attracted to the additional control, flexibility and cost-effectiveness an SMSF offers, but there is one additional feature – responsibility.

As a trustee of your own fund (or director of the fund’s corporate trustee) you and your fellow trustees become responsible for all decisions about how your retirement savings are invested and managed, irrespective of any professionals you may enlist to assist.

You also lose access to the Superannuation Complaints Tribunal and the statutory compensation scheme available to other superannuation funds in the event of fraud, so a dispute regarding your fund will generally need to be resolved by the courts, potentially at your expense.

Action: Consider the level of responsibility you are willing to take for your own investment decisions. If ultimate responsibility makes you uncomfortable, an SMSF may not be the right vehicle.

For most potential trustees, however, the benefits of managing their own retirement savings far outweigh the risks. The benefits are both financial and emotional. SMSFs can be considerably more cost-effective than using a public offer fund, depending on how they are managed.

This is partly because the cost of most public offer funds is determined as a percentage of funds invested, whereas many administrative costs (such as accounting and compliance) for SMSFs are fixed. This can greatly reduce the benefit of being in a public offer fund for those with large balances.

An SMSF also gives you the opportunity to pool superannuation balances and therefore share fund expenses with up to three other people (the legislative limit of four members). This can also allow you to access larger assets and wholesale pricing for your investments, which may not otherwise be possible.

Action: Before establishing an SMSF, thoroughly investigate the likely costs and compare them with your current fund as well as others in the market.

Cost-effectiveness is not the only reason to set up an SMSF, however. As the ultimate decision-maker regarding your retirement savings, it is important that you have a strong desire to manage your own investments.

This will include researching, analysing and constructing your portfolio, and reviewing it on a regular basis, as well as maintaining fund records and meeting your regulatory obligations (such as submitting an annual tax return).

If you are not motivated by the thought of investing and find keeping on top of your financial records difficult, an SMSF is probably not right for you. You should anticipate spending a couple of hours a month keeping on top of your fund’s arrangements if you have simple affairs, or outsource the paperwork to an SMSF specialist accountant or administration service. If you intend to run a complex investment strategy or handle your own accounts, the time required could be considerably more.

Action: Consider your desire and aptitude for managing your investments. If it is not motivating for you, employing a professional fund manager may be a better option.

If you are comfortable with making investment decisions or willing to invest time and effort in educating yourself, an SMSF gives you almost unlimited control and flexibility when it comes to retirement savings. An SMSF allows you to invest in assets generally unavailable through a public offer fund, such as direct property, hybrid securities, initial public offerings and direct international shares.

Many people have chosen to become SMSF trustees specifically to access these assets, because they believe the returns will be greater than those from other assets over time. Compared to a public offer fund, an SMSF even allows you to find the best value with a simple investment like cash, rather being forced into a single investment option that may only offer a low rate of return.

Action: Consider your need for non-traditional assets or your desire to select the best value option available. If you would like to access investments beyond traditional managed funds, an SMSF may be right for you.

Five additional key factors to consider:

If the key features of an SMSF – control, flexibility and cost-effectiveness – appeal to you, there are some additional factors to consider before establishing a fund.

  1. Confirm you can be an SMSF trustee. A disqualified person cannot be an SMSF trustee, nor the director of a corporate trustee. This includes, but is not limited to, undischarged bankrupts and any person convicted of an offence involving dishonesty.
  2. Choose your fellow trustees wisely. An SMSF may have up to four trustees or directors of a corporate trustee. Most SMSFs are run by husband and wife but there are many other arrangements. Given the potential cost of a dispute, ensure you are completely aligned with your chosen trustees in why you are setting up the fund and what you want to achieve.
  3. Choose the right structure. As mentioned, you can set up an SMSF with either individual trustees or a corporate trustee. While the latter is generally more expensive, it has a number of advantages, including the ability to have a single-member fund and potentially greater asset protection in the event a trustee is sued.
  4. Choose the right partners to work with. Although doing it yourself is central to running an SMSF, there are many aspects where you may want or need to engage a professional. In establishing your fund, you can choose to purchase a trust deed (generally online), visit a professional accountant or financial planner, or engage a specialist administrator. Using a specialist can be more costly, but many inexpensive providers receive commissions from products they require you to use (such as a default cash account). Ensure any providers you use have specialist SMSF expertise and a strong track record.
  5. Spend time getting your set-up right. Take the time to determine the right investment strategy for your fund, as well as ensuring you have covered other important decisions like whether or not to include binding death benefit nominations in your trust deed. Running your own superannuation fund is a marathon, not a sprint, but it helps if you have done the preparation.

Ultimately, the decision to manage your own retirement savings could be the most important financial decision you ever make. SMSF trustees generally are considerably more satisfied with their super than members of other funds. However, it does take time and effort.

Take advantage of the wealth of great information available online and through professionals to ensure you make the most of your investments, and continue to educate yourself about the opportunities available.

About the author

@gemma_dale is Head of SMSF Solutions at nabtrade.

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