As individuals look to take more control over their retirement assets, Self-Managed Superannuation Funds (SMSFs) are becoming increasingly common in Australia. However, as APRA fund regulated funds continue to become more customisable, is the hype around SMSFs warranted or are you better off steering clear?
In this months edition of WD life, we look at the pros and cons of both SMSFs and APRA regulated funds to see which option if either, come out on top.
It is important to always understand there is never a ‘one size fits all’ principle when it comes to investing your superannuation benefits.
The benefits of an SMSF
1. Greater control
SMSFs enable you to take control of your financial future. The desire to gain greater control over superannuation assets and investments is the leading motivation for the establishment of SMSFs. As a trustee, you are responsible for making decisions on where your money is invested. You control the fees, and you control the ability to achieve higher returns by choosing how you investment your superannaution benefits. It is this sense of comfort, confidence and security in managing your own affairs that cannot be measured.
2. Flexible investment options
SMSFs provide the ultimate level of investment flexibility and choice. In addition to shares, fixed interest, and managed funds, SMSFs can offer increased flexibility. As such you have the ability to invest directly into property, commodities, unlisted companies, and unlisted managed funds and trusts. This can even include your own small business property. This ability to create a diverse, tailored portfolio is unmatched when compared to institutional superannuation funds.
3. Tax Efficiency
SMSFs can also provide additional flexibility to manage the tax paid by your fund. The flexibility of an SMSF allows individuals to control the timing of contributions and the purchase and sale of investments to achieve the best retirement savings outcome for members. SMSFs also provide for a seamless transition from accumulation to pension phase.
4. Greater Estate Plan control
With proper planning, and if structured correctly, an SMSF can provide additionally flexibility and certainty regarding when, and to whom, death benefits are paid from your retirement assets.
Where an APRA fund might be better suited
According to the SMSF Association, the majority of SMSF trustees spend between 1 to 5 hours a month administering their SMSF. For many people, allocating this time to review their superannuation is unrealistic and not manageable. APRA regulated super funds however do not require you to spend any time reviewing your super’s feasibility as this is taken care of by the fund itself. This can alleviate a lot of unwanted stress and labor hours associated with ensuring your superannuation benefits are well-managed.
3. Less compliance
Another downfall to having an SMSF that you won’t have to deal with being invested in an APRA regulated funds is staying on top of the ever-changing compliance regulations set out by the ATO. To ensure SMSFs are being utilised for their intended purpose, the ATO will make necessary changes to legislation or add new rulings. As a SMSF Trustee, it is your responsibility to stay up-to-date with any new changes and ensure you abide by them. Similarly to the above point, many people do not have the time or want the stress of making sure their SMSF is in line with current legislation. As such, APRA regulated funds provide a more stress free alternative as the fund will manage any compliance.
2. Potentially more cost effective
It is important to understand that an SMSF is not suitable for all investors. According to the SMSF Association, SMSFs only become an overall cheaper alternative to APRA regulated fund if the total fund value exceeds $500,000. Before this point, an APRA regulated fund may be more cost effective depending on which investment option the member chooses to invest in. This is not to mention the additional legal and accounting costs to ensure your SMSF meets regulation. As such, a APRA regulated fund may be more appropriate for individuals with low super balances and or, aren’t willing to pay the additional costs of an SMSF.
4. SMSF is not a guarantee of returns
Having an SMSF doesn’t automatically constitute greater performance. Yes, you have the control to choose how your super benefits are invested but their are many APRA regulated funds that allow you to customise your investment options (to an extant) to your risk tolerance.
Like most financial decisions, there is no one definitive option for success. Both SMSFs and APRA regulated funds are appropriate investment vehicles for your superannuation benefits however, their effectiveness will vary depending on your financial situation and lifestyle.
In summary, if you have a substantial amount of money accumulated in super, wish to take control over your investment option (potentially invest in property) and are willing to take the time to ensure your SMSF is compliant, an SMSF may be a great investment tool for you.
On the other hand, if your superannuation balance is low or you would prefer that the responsibility that your superannuation benefits are managed and invested by trusted professionals, an APRA regulated fund may be more suited to your circumstances.
If you are currently weighing up between an SMSF or an APRA regulated fund and would like some further clarity on which option is more suitable for your needs, we are more then happy to help you on your financial journey.