Maintaining a Self-Managed Super Funds in Retirement

November 20, 2019

Self-managed super funds (SMSFs) are usually set up by people who want to have a more direct ‘hands-on’ role in running the fund, or where the members have a special interest in holding a certain type of asset within the fund. There are certain attractions that SMSFs have, which prompt individuals to establish their own fund, rather than invest their superannuation within a public offer fund. The main advantages associated with SMSFs include:

  1. Control: Greater flexibility and choice is possible within a SMSF, particularly with respect to the types of investments that can be held within the fund. For instance, a SMSF may invest in non-traditional assets such as works of art or collectibles. Exposure to such assets is not available within a public offer fund.
  2. Possible cost saving: There are possible cost savings available in relation to running a SMSF, however this is largely dependent upon economies of scale. Clearly those that have large amounts of money to invest are the most advantaged in having a SMSF. The cost of maintaining a SMSF can vary widely, depending on service providers, the composition of the investment portfolio and the degree that the portfolio is traded.
  3. Enhanced earnings through allowable borrowings: From 24 September 2007, an exception to the general prohibition rules apply to SMSF fund borrowings that meet certain conditions of limited recourse borrowing arrangements (LRBA). This may allow SMSFs borrow additional funds for investment purposes.

Although SMSFs may seem attractive given their advantages, there are particular issues associated with them that mean they are not appropriate for everyone, even if an investor has a sizeable amount of money to invest. Some of the disadvantages include:

  1. You are responsible: As it is unlikely that trustees of the fund will have specialist superannuation knowledge, the risk of non-compliance is increased. All decisions and responsibilities of managing a SMSF rest with you as trustee (your responsibilities cannot be delegated to advisers and administrators). If trustees do not comply with the SIS Act and Regulations, they risk the SMSF to be deemed non-compliant, that could result in a loss of tax concessions and considerable financial implications for the members.
  2. Time and skills required: Trustees are legally responsible for the preparation of an investment strategy, selecting and managing investments, record-keeping, reporting and preparation of tax and regulatory returns. All of the decisions made with respect to the SMSF must be made by the members, and if legislation changes the member should be aware of this and any impact this may have on their SMSF. Consequently, as a result of these obligations it can be seen that the management of a SMSF requires greater focus and time of a member than an investment in a public offer superannuation fund. Therefore, trustees must have either the time and skills required to perform these functions, or the capacity to pay external service providers.
  3. Performance of fund: As most members will lack the expertise and resources of a professional fund manager, it is likely that the returns of a SMSF would underperform that achieved over the medium to longer term of a public offer fund. The danger also exists that trustees will not have true diversification within the fund, which can impact on performance.
  4. Potential higher costs: Due to economies of scale, costs involved in running a SMSF can be higher than those through a public offer fund. Costs incurred in running a SMSF include the preparation of an annual regulatory and tax return, payment of a supervisory levy to the ATO, preparation of an annual audit and any management expenses that might be incurred through SMSF investments. Cost consideration should also be given to the time required to perform the administration duties required such as the reporting obligations required by trustees to the ATO and record-keeping requirements.

It is common that leading to retirement people would like to simplify their affairs and actually focus on enjoying the well deserved retirement rather than running around with paperwork. At that point they may start questioning whether they should maintain their Self-managed superannuation fund. Having a SMSF could make your retirement structure more complicated than what you are looking for from your superannuation investments. Also, winding up the SMSF can save you a considerable amount on fees every year.

If you would like to discuss the suitability of maintaining a Self-managed superannuation fund in your particular situation, please give is a call or drop us an email.