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4 things to know before you switch to an SMSF

There are many great reasons to have a self-managed super fund (SMSF) – financial freedom, autonomy, lower fees, tax benefits and the satisfaction of controlling your own future.

Over one million Australians have made the switch from industry funds to an SMSF in the past decade. But an SMSF isn’t a one-size-fits-all solution. Before you switch from a retail or industry superannuation fund to an SMSF you need to be sure that you’re making the right decision based on your own personal circumstances, expertise and skills.

Switch to an SMSF

1. Time and knowledge

Managing your own SMSF is an ongoing commitment and you’ll need to invest the time to regularly review the strategy and performance of your SMSF. You'll also need to keep accurate records, meet your legal obligations and make sure your SMSF is on track to provide for the retirement needs of its members.

What is your investment strategy? How will you diversify and spread your investment risk? If you’re not confident you have the skills and time to do this yourself, you can pay for professional investment advice from a financial advisor or seek additional support or education, but as a trustee all responsibility still legally rests with you. Alternatively, you may be best off sticking with a retail or industry superannuation fund.

2. Control

One of the main benefits of running your own SMSF is flexibility over where and how you invest your retirement savings. From shares to pensions and property, the choices – and benefits – are all yours. But this autonomy comes at a price.

SMSFs are a kind of trust, and as a trustee or corporate director of an SMSF you are personally responsible for complying with the superannuation and tax laws, which are regulated by the ATO. You need to keep accurate records, and complete several annual duties, such as appointing an auditor, preparing member statements and submitting an annual report to the ATO. Harsh penalties apply for contravening these laws.

You’ll also need to consider and arrange any insurance yourself, and SMSFs are excluded from applying for financial assistance or compensation for things like fraud under the super laws.

3. Family

Establishing an SMSF is a big financial decision that will have an impact on your retirement plans. The plans of close family members should be considered alongside your own, regardless of whether you decide to go it alone or set up a family retirement fund.

An SMSF requires a minimum of two individual trustees, but can have up to four adult members aged 18 or older. Depending on your stage of life you may wish to establish a joint SMSF with your partner or add adult children to your SMSF. You’ll need to explore the pros and cons of each approach and the long term implications for all members as well as the fund.

4. Money

In theory it's possible to start an SMSF with any monetary amount, but you need to ensure you have enough to make it viable. At the very least, the balance of your SMSF needs to cover the costs involved in running it. Then there are the investments you intend to make plus associated costs like brokerage fees for share trading and the annual ATO supervisory levy.

Will you have sufficient money to take advantage of the cost savings (such as tax breaks) associated with running an SMSF?

In contrast to retail and industry superannuation funds, SMSF members are able to make contributions of either cash or assets (in specie contributions) in the form of listed shares, managed funds and commercial property. Consolidating assets under an SMSF can be beneficial, but you should first investigate any stamp duty, tax or capital gains tax ramifications, and be aware you cannot access the funds until you reach preservation age.

In addition, an SMSF can operate as both a pension and accumulation fund in one. You may be able to draw a pension and still contribute to the SMSF, while other types of funds require these to be separate.

An SMSF can give you financial control and the freedom to invest your retirement savings in a wide range of options, from term deposits and shares to residential and commercial property. There are also providers that offer you a low annual fee to administer your SMSF's compliance obligations.

If you want to learn more about SMSFs, download an information pack today.

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