Ingredients Of A Good Financial Plan – Part 4 SMSF
Posted on:
Raffi Pailagian
MBA, BSc, DipFP
Financial Planner / Managing Partner
Ingredients Of A Good Financial Plan – SMSF
Superannuation is a huge part of any good financial plan. When thinking about Super you essentially have two options, a traditional fund or a Self-Managed Super Fund (SMSF). The popularity of SMSF’s has grown enormously in the past five years and there are some great benefits, but also some downsides.
First and foremost, if you decide to go this route you need to be committed to the process. Second, because there are some serious rules and responsibilities involved, you need to seek professional advice.
Let’s look at the pros and cons of going down this route with your hard-earned money, as well as how this could fit into a good financial plan.
What Is A SMSF
As the name suggests, a SMSF is a fund you manage yourself, for the sole purpose of providing funding for your retirement. A fund can have up to 4 members, although most funds have two members, generally life partners. All members are trustees of the fund, and therefore responsible for both performance and compliance with tax laws.
Currently, there are over 1.1 million Australians with a SMSF and over $672 billion under investment.[i]
Pros
Flexibility
Because you are in the driver’s seat you can buy and sell assets as you choose, allowing you to take advantage of opportunities that may come up.
Choice
You choose the assets you wish to invest in. This might mean direct property investment (although there are some strict rules here) or even investing in artwork. It’s all up to you.
Borrowing
In a SMSF you can borrow money to buy assets. This is called a LRBA (Limited Recourse Borrowing Arrangement). This allows you to buy property or shares within your SMSF. The limited nature of the loan protects the other assets in the SMSF in the case of problems.
Tax
The same tax benefits apply to a SMSF as any other Superannuation account. However, because you control how you set up your SMSF (within the very strict rules) you can put in place tax strategies that work best with your overall financial plan and circumstances, thereby maximising the tax benefits of your superannuation nest egg.
Involvement
This is a bit of a double-edged sword. In a SMSF you are the one making the investment decisions, even if you are using a Financial Advisor. This means you keep a closer eye on your investments which may give you a feeling of control.
On the other hand, it does mean you need to spend time doing research and watching what is going on in the markets. So, if being involved sounds like more of a curse than a blessing, a SMSF is probably not for you.
Cons
Liability
You are personally responsible for all the decisions made by your SMSF. Even if you use a Financial Adviser, under the rules governing SMSFs, the trustees, or members, are responsible. The tax department will hold you personally responsible if there are irregularities.
Costs
Setting up and running a SMSF is more costly than investing in a retail, industry or corporate fund. These costs can quickly eat away at your returns, which brings us neatly to the next point…
Returns
Despite their popularity, SMSFs have, on average, underperformed against traditional superannuation accounts. This is primarily due to highly skilled and experienced fund managers operating superannuation funds.
Knowledge
If you want your SMSF to perform, you need to understand the market and have a broad knowledge of your investment options, not to mention the regulations around SMSFs. As we said earlier, you are responsible. Ignorance of the law is no excuse.
Time
There is a lot of work in a SMSF, and not just in setting it up. According to the SMSF Investor Report, it takes an average of 8 hours per month to manage a SMSF. That’s more time than it takes to play a round of golf. You need to consider if this is how you want to be spending your spare time.
Support
Should something go wrong in your SMSF, such as fraud, you have no recourse to the Superannuation Complaints Tribunal. The buck literally does stop with you.
A SMSF Is For Me
If you think a SMSF is the best option for you, the first thing you need to do is find a Financial Planner experienced in setting up and running this type of investment account. They will be able to look at your individual financial position and guide you as to the best way forward.
If you don’t think you want to take on the responsibility of a SMSF, stay tuned for our next article where we will fill you in on all you might need to know about industry, retail, and corporate superannuation funds.
If you would like to discuss whether a SMSF is right for your circumstances with a professional experienced in this field, give us a call on (02) 9976 3388 or click below and we will be in touch shortly.
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