Editor’s note: This article contains information only. It is not intended as general or personal advice. Your Money recommends seeking professional advice specific to your personal circumstances.
While nearly every working Australian has a superannuation account, not all super is created equal.
While the majority of Australians have regular super accounts, split into industry and retail funds, there is also a more generous public sector system for government employees, and as well as self-managed super funds (SMSFs).
Given the animosity between some of these factions – just this week, industry funds went on the offensive – it’s worth asking whether SMSFs are right for you.
As the name suggests, SMSFs allow Australians to exercise more control over how they allocate their retirement savings.
Now while that extra flexibility may sound appealing they’re certainly not for everybody, as they come with their own legal framework, My Millennial Money financial adviser Glen James told Your Money Live.
“If you want your life to be simpler it might not be for you because you’re effectively starting a company,” James said.
Given that, how do you know if an SMSF is right for you?
How much money do you need?
The very first consideration for anyone when it comes to opening an SMSF is a matter of money.
Given the costs involved in operating an SMSF, you require a sizeable amount to make it worthwhile.
“If you’ve got a large super balance, up towards one million dollars or more it can be cost-effective in terms of investment fees because you’re really getting economies of scale and you are now becoming the platform for the money,” James said.
While estimates differ about the absolute minimum balance required, SMSF Association specialist adviser Liam Shorte said there is a general consensus.
“The costs are coming down but to be putting in the time and effort and considering the fees and charges involved, you need to have a considerable amount in there. You’d need to be getting around the $500,000-$750,000 mark,” Shorte told YourMoney.com.au.
If you satisfy the capital requirement, you’ll need to understand exactly what you’re getting yourself in for.
Legally speaking, when you open an SMSF you become a ‘trustee’ of the fund and are responsible for everything that happens within it.
“You’ve really got to be aware though that you have the same trustee responsibilities as any other super fund in Australia. Whether it’s the biggest fund in Australia or you’re own little SMSF, you’re held to the same legislation,” James explained.
That means you can’t sit back and expect your fund to run itself.
Of course, with that great responsibility comes a great deal of paperwork.
“Every time you put money into your super, the fund takes the 15 per cent tax and gives it to the government [but] if you have an SMSF you have to do that yourself,” James said.
That’ll require help from an accountant and auditor to ensure you’re complying with all your trustee obligations.
All in all, SMSFs require significantly more work than your average super fund.
Greater control of your estate
If you can live with the extra responsibilities though, then there are certainly benefits to owning an SMSF as well.
A major advantage is the control it allows you to exert over your financial affairs, particularly when it comes to estate planning.
“If you’ve got a complex family situation or a blended family, or you’ve got the Brady Bunch and there’s a bit of money involved, and you want a little more control should you die prematurely, [an SMSF] could be an option,” James explained.
It also allows you to pool your family’s superannuation.
“You can have up to four members and soon you may be able to have six . For a family that invests as a family, it may be a very good way to do it,” Shorte explained.
Another major reason some people gravitate towards SMSFs is the fact that it allows you to access a large pool of your own money to buy assets that maybe you wouldn’t be able to otherwise.
Property is a great example, enabling trustees to select and purchase a house or apartment with the fund.
However, don’t think you can just go and buy a place to live. Any property owned by your SMSF can be rented out and sold as normal, but you as the trustee are not allowed to reside there.
There’s always a catch
While SMSFs do enable plenty more choice to Australians what they do with their money, there are also plenty of strict rules associated with them.
Ultimately what you buy within the SMSF is legally owned by that investment vehicle and you, as the trustee of that SMSF, cannot treat those assets as your own personal property.
Assets owned by the SMSF are subject to the ‘sole purpose test’ which restricts how you deal with them.
The sole purpose of superannuation is, after all, to protect and grow your retirement savings. The things you buy within it thus must be treated strictly as investments.
“The ATO is not in the habit of telling you what you can’t invest in, but they’re more engaged in why you’re investing and asking whether it meets the sole purpose test and are you following the rules regarding the acquisition holding, insurance and disposal,” Shorte explained.
You can, for example, collect alcohol in your SMSF – a thought that would appeal to many Australians – but before you go drinking away your retirement future, there’s a catch.
“While you’re in the accumulation phase you can’t consume these things. For something like paintings or books or coins or wine or whiskey, you can’t store them on your own property. They have to be stored professionally and insured in the name of the fund,” Shorte explained.
When you move into the pension phase however, there is an opportunity to savour the fruits of your labour but again, with some strings attached.
“You might record on 20 December coming up to Christmas that you’ve taken a case of wine out of your SMSF as a lump sum computation. You would pay the market value for that whiskey or wine if you’re in pension phase and there would be no capital gains tax on the transaction,” Shorte explained.
“It’s effectively a sale and you have to sell at market value.”
So is an SMSF worth it?
Well, it depends.
While there are plenty of advantages to owning an SMSF, there is also considerable responsibility and costs that come along with it. If you are thinking about opening one, it’s important to understand your responsibilities, consider your own personal circumstances and seek professional financial advice.
Watch James’ full comments above.