Pros & Cons of Self Managed Super Funds

A relatively new investment vehicle that is gaining popularity in Australia is the self-managed super fund (SMSF). SMSFs are an exciting and credible avenue for investment that you can explore further.

First and foremost, self-managed super funds (SMSF) are not exclusively for the wealthy. The administration costs of an SMSF are often set fees, compared to other super funds which charge a percentage fee based on the number of funds you have invested. As a result, the more money you have in your SMSF, the less expensive it comparatively becomes to run. However, large retail superannuation funds pool your money with others, allowing for greater diversification of the investment. For your SMSF to produce a similar level of diversification, you would require a substantial amount of money.

On the plus side, SMSFs have many benefits irrespective of the sum invested. Such benefits include the ability to borrow money, albeit under tight legislative guidelines. SMSFs pay fewer fees, give you greater control of your investment, and can realise greater returns on average than large superannuation funds.

As with any type of investment vehicle, the amount you need for an SMSF to be effective depends on your investment strategy, tolerance to risk, time until retirement, and preferred choice of asset classes.

The biggest drawback of SMSFs is that they can be very restrictive. The superannuation industry is heavily regulated, and SMSFs are no exception. If you act counter to the regulations you can be heavily penalised.

Furthermore, transitioning from an SMSF back to a retail super fund could present some difficulty. This is because you may need to sell all of the assets held by your SMSF. Consequently, the fund may become liable for capital gains tax without the ability to transfer any capital loss to the new fund.

As a general rule, the minimum amount needed to make an SMSF a viable option is around $500,000.

Investing through an SMSF should not be undertaken lightly and is not for novice investor. Given the complexities of SMSFs, it is imperative you seek professional advice from an appropriately qualified accountant and financial planner.