Setting up a self managed super fund (SMSF) can be complicated. Not getting it right can materially affect your financial situation and retirement plans. But don’t stress, this paper will help you ask the big questions.
The first question you need to be sure about is whether an SMSF is the right fit for you and your specific circumstances. We recommend seeking the advice of an SMSF Specialist. They can help you along the journey of setting up an SMSF and ensure setting up a fund is the right fit for you.
So, what else do you need to answer before you establish an SMSF?
You might have heard in the media in recent months that you need $1 million before you can consider setting up an SMSF. However, we do not believe that this is the case. SMSFs can make sense and be cost effective from as little as $200,000 with the appropriate fixed fees. It is therefore important you ensure you have an appropriate superannuation balance because low balance SMSFs may not be in your best interests. This is because SMSFs tend to be more cost efficient with larger balances.
Why do you want to set up an SMSF? Make sure you are considering a fund for the right reasons and that it suits your specific circumstances. The most common motivation SMSF trustees indicate as a reason for setting up a fund is for the control it offers. Control of an SMSF allows you to have a wide range of investment choice, flexibility and engagement with your superannuation.
However, superannuation law is complex and you need to ensure your ambitions are allowed by the regulations and will be able to be achieved within an SMSF. SMSF does stand for ‘self managed super fund’, but it doesn’t mean you have to go it alone, you should enlist the advice and services of an SMSF Specialist – as much or as little as you need their input.
Costs and time
SMSFs incur a wide range of costs in establishment and the day-to-day running of the fund. We recommend doing an estimate of the initial SMSF establishment and advice costs including preparation of the Trust Deed, ATO application forms, provision of binding death nomination forms, investment strategy and general trust and legal advice. We recommend speaking with an SMSF Specialist to gain an estimate of these costs so nothing comes as a surprise. You should also understand other costs, which unlike large super funds generally occur with fixed rates rather than as a proportion of your balance. These include:
- The annual SMSF supervisory levy collected by the ATO,
- The cost of producing an annual financial statement, tax return and Transfer Balance Account Reporting (TBAR), and
- Annual, independent audit fees.
The day-to-day running of an SMSF requires your dedicated attention to manage effectively. Understanding from the outset your legislated responsibilities and obligations before establishing a fund is important.
Decided an SMSF is right for you? Time to start the establishment process!
An SMSF Specialist is the best person to help you to choose a structure for the fund, produce a Trust Deed and complete the fund’s ATO registration and fund set up.
Investment strategy and insurance
You’ve established your SMSF – congratulations! Now what? You must now create an investment strategy that will guide the fund’s investment. Don’t worry, this isn’t set in stone. You must review your investment strategy regularly and can make changes as often as they are required, especially as your circumstances change.
Your investment strategy should be in writing and must consider:
- Diversification (investing in a range of assets and asset classes)
- The liquidity of the fund’s assets (how easily they can be converted to cash to meet your fund’s expenses)
- The fund’s ability to pay benefits (when members retire) and other costs it may incur
- The members’ needs and circumstances (for example, age and retirement needs)
- Considering whether to hold insurance in your SMSF.
A common motivation for SMSF trustees to set up a fund is as a way of investing in property. You should be sure that any investment in property, particularly when gearing is involved, is appropriate for your circumstances. Holding properties in an SMSF can require some complex structures to ensure the law is being followed and seeking advice from an SMSF Specialist may be needed before making an investment choice. A lack of diversification, low balances and inappropriate property investments may have a detrimental impact on your retirement savings.
When setting up a fund it is also important to consider preparing an SMSF exit strategy. Having these plans already in place may reduce the impact of ‘unexpected’ events, particularly relationship breakdowns, illness, incapacity and/or death of a member.
One of the biggest ‘unexpected’ events is the death of a member. Given the introduction of the $1.6 million transfer balance cap, larger sums of money may need to leave the superannuation system sooner which will require sufficient planning to ensure your wishes are met. The rules of your fund as set out in the Trust Deed and associated documents determines how death benefits are to be handled by the fund. It’s best to consider these when establishing your fund and the Trust Deed is first prepared.
Some other key considerations to make as part of your contingency plan include:
- Access to important documents – ensure all trustees have the same access to SMSF records and electronic transaction accounts, don’t leave it to one member.
- Binding death benefit nominations – make them, document them and review them every three years.
- Enduring power of attorney – encourage all members to appoint one.
- Diminished capacity – consider the consequences if you’re unable to continue carrying out your duties as an SMSF trustees (e.g. due to mental incapacity)
- Relationship breakdown – family law contains a number of options for super to be split between a couple who has separated or divorced. SMSF Specialist advice is recommended as super is treated separately to other property.
You don’t have to do it all yourself, seek help
SMSF does stand for self managed superannuation fund but you don’t have to do it alone. Assistance from an appropriately qualified SMSF Specialist is encouraged to ensure you are making the most appropriate choices for your specific circumstances.
Disclaimer: The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.