The pros and cons of SMSFs
Australia’s self-managed superannuation sector is unique. No other country allows hundreds of thousands of small, private pension funds to be run by members who also act as trustees, and SMSFs continue to increase in popularity.
However there are pros and cons which need to be carefully considered before you make a decision on what do in planning for your retirement nest egg.
Pros
Cost savings - If a fund is well set up and costs are managed carefully, an SMSF can represent a significant cost saving compared to the fee structure of commercially available superannuation funds.
Ways to invest differently - SMSFs enable members to invest in a way that is generally not available in most large super funds. For instance, SMSFs can hold direct property, unlisted shares, artwork and other not-so-common investments.
Choice, control and flexibility - The trustees have a great deal of leeway to make independent, quicker decisions on the types of investments made. This allows them the flexibility to respond to changing market conditions and to design customised retirement income streams.
Business premisesinvestment - Many SME owners hold their business premises in their SMSFs for tax-effectiveness, asset-protection, succession planning (for family enterprises) and security of tenancy.
Cons
Costs - Cost savings can be one of the greatest benefits of an SMSF. However, the opposite can also be the case. Investors with insufficient funds to invest, and those who are not careful to control costs may find managing an SMSF prohibitively expensive.
Increased time commitment - The very nature of an SMSF requires trustees to take an active interest in the management of the fund and will require a certain time commitment from trustees regardless of professional adviser involvement.
Need for investment knowledge - Ideally, SMSF members should have a much more thorough understanding of at least the basics of sound investment practices than members of big funds.
Risk of non-compliance - The ATO takes compliance issues surrounding SMSFs seriously and the penalties for non-compliance are severe (up to 45% – the entire fund balance as a tax penalty and the risk of prosecutions). Trustees must therefore keep a very close eye on their fund as they can face civil and criminal sanctions for serious breaches.
Risk of poor diversity - Some SMSFs are established specifically to buy a single valuable asset such as business real estate. This means the fate of the fund depends on the performance of that asset which may be inadequately diversified for risk and return.
Investment restrictions - Although an SMSF can provide members with more investment freedom than large funds, there are stringent restrictions on their investments. For instance, super funds must be maintained for the sole purpose of providing retirement benefits – not to subsidise pre-retirement lifestyles, and funds are prohibited from providing loans to members.
Losing interest or capacity - Many people set up SMSFs with great ambitions and then lose interest or capacity as they get older, which can impact on performance.