Could a self-managed super fund be right for you?

For the majority of us, we’re perfectly happy having our super paid to our chosen fund, which will invest it as directed and, generally, get us a good return by the time we retire.

But there is a growing cohort, worth some $900 billion, of Australians who instead opt to have full control over their super via a self-managed super fund (SMSF).

Having full control over your superannuation sounds great in theory, but there’s much more to self-managed super than meets the eye.Credit: Marija Ercegovac

An SMSF is a private super fund option managed by the members within it. It’s an alternative to an industry or retail superannuation fund, offering people more autonomy and control of how their super contributions are invested. SMSFs are also known as ‘DIY super’.

More power sounds great, right? Well, there’s much more to be considered when it comes to SMSFs, including the responsibilities and risks that come with them.

The anatomy of a SMSF

SMSFs can have from one to six members in them and commonly comprise people from the same family. “In most cases, it’s two members, being spouses or partners,” says Melbourne-based financial planner and SMSF specialist Boris Barna.

SMSFs were first introduced in 1999, and as such, they’re starting to include multiple generations.

In terms of the mechanics, setting up an SMSF involves creating a trust with either individual or corporate trustees. Technically, all members of the SMSF must also be its trustees.

“A SMSF member needs to be actively involved due to being the trustee of the fund. They are personally responsible for looking after the fund’s money and compliance,” Barna says.

“There are many responsibilities trustees need to undertake on an ongoing basis when running a SMSF compliantly. So, unlike being a member of an industry or retail super fund, it is not a set-and-forget exercise.”

What’s involved in managing an SMSF?

Setting up an SMSF is a complex exercise, and it’s important to engage the right people at the right time. Sydney-based financial planner and SMSF specialist Liam Shorte recommends doing this from the get-go.

“You can either seek advice from a SMSF specialist or use a SMSF administration service to set up your fund,” says Shorte. “I would recommend you get advice first to ensure you are aware of the tips and traps of setting up a fund and moving your super and insurances across.”

Essentially, trustees need to ‘self-manage’ or control who does the administration, tax reporting and auditing of the SMSF.

Accounting and auditing are a big part of the job. “SMSFs are regulated by the ATO and not by the Australian Prudential Regulation Authority (APRA), which oversees retail and industry superannuation funds,” says Barna. “Due to the ATO being the regulator, the SMSF accounts will need to be prepared annually. Members can do this themselves or outsource to an accountant.

“They also must be audited annually by an independent third-party auditor before submitting to the ATO.”

The other major element is preparing and documenting an investment strategy to meet the fund’s objectives. “You need to consider many factors, from diversification of investments, members’ risk tolerance, underlined investments risk-return ratio, and the need for insurance for its members to name a few,” says Barna.

Many will also work with a financial planner to design their investment portfolio or work out the best contribution, pension and borrowing strategies for their fund. “But that is not compulsory, as you ultimately decide how hands-on you want to be in running the fund,” says Shorte.

What are the benefits?

One of the most attractive benefits is being able to decide how super contributions are invested.

According to the ATO, there are currently 616,000 SMSFs in Australia with over 1.1 million members.

“SMSF investors like to buy stocks they know well from companies they use every day, whether in Australia or globally, or use ETFs to target specific sectors like the global tech giants or high dividend payers,” says Shorte.

“You can also invest in tangible assets such as paintings, classic cars and even the very high-risk crypto assets, the list goes on,” says Barna.

SMSFs also come with numerous property and tax planning strategies, but access to these depends on individual circumstances and conditions.

One of these strategies may allow “a businessperson who rents premises for their business to own business real property via their SMSF and pay rent to their SMSF. So, in effect taking money from one pocket and putting it into another one tax efficiently,” says Barna.

Additionally, Shorte says due to the often fixed or flat admin tax and audit costs, there are savings to be made by having two or more family members in one SMSF.

What are some of the challenges?

The main point of issue when it comes to SMSFs is how time-consuming managing one can be. On average, SMSF trustees spend more than eight hours a month managing an SMSF.

The other is liability. “Members and trustees have obligations and must ensure that the fund is always compliant,” says Barna.

“Even if third-party professionals are contracted to manage the SMSF, members’ and trustees’ ignorance cannot be an excuse if Superannuation Industry (Supervision) Act rules are breached.”

“Penalties for breaches can be very costly and may include anything from education directions, administrative penalties, the freezing of the fund’s assets to trustee disqualifications and civil and criminal penalties.”

Is a SMSF right for you?

According to the ATO, there are currently 616,000 SMSFs in Australia with over 1.1 million members. How happy are they with choosing the SMSF path? Roy Morgan’s 2024 Superannuation Satisfaction Report says 76 per cent of SMSF members are happy with their fund performance, followed by 69 per cent in industry funds and 60 per cent in retail funds.

Satisfaction aside, SMSFs are not for everyone. Shorte says it’s important not to rush in deciding to set up a SMSF, do plenty of your own research and understand how you could benefit from one.

Barna and Shorte both recommend people watch the ATOs SMSF informational videos. These videos might help guide your initial thinking, and they encourage people to ask themselves three key things:

1. Whether they’re financially savvy.
2. If they can understand lengthy and complex Superannuation Industry (Supervision) Act rules.
3. If they have the time to manage a SMSF, or have a third party that can manage it for them.

If one of these three doesn’t apply, it might be worth getting some more advice before jumping into the SMSF world.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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This story was created in partnership with Colonial First State. The content is independent of any influence by the commercial partner.