What is a Self-Managed Super Fund (SMSF) and is it right for you?

Thinking about taking your super into your own hands? While running your own fund does mean extra responsibilities and a few risks, it also gives you more control and flexibility over where your money goes. To understand whether the rewards are worth risk, the first step is understanding exactly what a Self-Managed Super Fund is all about.

What is an SMSF? 

A Self-Managed Super Fund, or an SMSF, is a super fund that you set up and actively manage yourself. You can do this either as an individual or as part of a group of up to six members, all of whom can be either individual or corporate trustees. 

Managing your own super fund can be a lot of work. Everything from setting up an SMSF, researching investments and developing an investment strategy and acting according to your investment strategy is your responsibility. You also need to ensure that all record keeping and administration is up to date and that all regulatory conditions are met. 

There are risks and challenges, but also rewards, with SMSFs offering unique benefits such as flexibility and control and the ability to invest in a diverse range of assets that simply aren’t possible for larger more traditional super funds.  

How does an SMSF work?

If you have – or are part of – an SMSF, rather than paying super into a traditional super fund, such as an industry or retail fund, you pay it into your SMSF, which you control. Your job as a member and trustee is to invest that money and grow it so that when you reach retirement age and can access it, it’s enough to fund the lifestyle you want when you retire.  

How are SMSFs different from APRA-regulated super funds? 

Most Australians have their super in retail or industry funds, which are overseen by the Australian Prudential Regulation Authority (APRA). APRA is the Government body responsible for the licencing and regulatory oversight of financial entities in Australia. 

There are many ways in which SMSFs and APRA-regulated super funds are similar. For example, both are taxed at concessional tax rates and can only be accessed in retirement. There are, however, some notable ways in which they differ. 

Regulatory bodies: Unlike APRA-regulated super funds, SMSFs are regulated by the Australian Tax Office (ATO) and are subject to different rules and requirements. They also don’t have the same protections.  

If something goes wrong, such as fraud or theft, members of an APRA-regulated super fund can raise their complaints with the Australian Financial Complaints Authority (AFCA) and seek compensation through the Superannuation Compensation Scheme. Members of an SMSF, however, cannot. 

Number of members: Another key difference is the number of members a fund can have. APRA-regulated funds can have millions of members. SMSFs are limited to six, with each member also required to be a trustee, though they can have as few as one. However, in single member SMSFs, a second external trustee is required.  

APRA-regulated funds are also more accessible than SMSFs, with broader eligibility around who can be a member. People with intellectual disabilities, people who are bankrupt, and people who aren’t residents of Australia can’t become members of an SMSF. They can, however, join an APRA-regulated fund. 

Investment responsibilities: In APRA-regulated super funds, an APRA-licensed trustee is responsible for all fund decisions, including investments, and will often appoint professional investment managers to select and manage assets day-to-day. While SMSF trustees can also appoint an investment manager, ultimately, responsibility for the fund’s investment strategy and compliance remains with them.  

Investment choice: APRA-regulated funds invest in a wide range of assets. These can include shares, property, fixed interest and even cryptocurrency. However, rather than choosing specific assets themselves, members usually select from pre-defined investment options. In contrast, SMSFs provide members with greater flexibility to diversify their portfolio, allowing them to invest in things like artwork and investment properties as well, provided they adhere to strict regulations. 

What are the benefits of an SMSF? 

For those looking to play a more active role in growing their retirement savings, an SMSF provides incredible flexibility and control, as well as some unique opportunities for growing your wealth. 

Building wealth through property: SMSF members can invest in property, subject to strict conditions. An SMSF loan allows the fund to borrow money to invest in property. This borrowing is often structured through a Limited Recourse Borrowing Arrangement (LRBA), where the lender's recourse is limited to the asset purchased with the loan. This not only adds rental income to your super earnings, but can also be leveraged to gives you access to the property market as a potential capital gain, taxed at a lower concessional super rate. 

Market agility: With membership for an SMSF capped at six people, SMSFs can move more quickly than APRA-regulated super funds. This can be particularly useful when you need to take advantage of – or protecting yourself from – volatility in the market.  

Cashflow management: SMSF-specific saver accounts and cash accounts can help you manage your fund’s cashflow efficiently and make sure your super funds are working harder for you.

What do I need to consider before switching to an SMSF? 

For proactive, wealth-focused Australians with an eye on the property market, starting and managing an SMSF can be a great way to grow your retirement savings. However, while there are benefits to setting up an SMSF, there are also various risks and responsibilities to consider. 

In an SMSF, each member – or trustee – is personally liable for all investment decisions. It’s also their responsibility to ensure they remain fully compliant with all ATO obligations for record keeping and reporting. 

Setting up an SMSF is an ongoing commitment and requires a level of expertise in not only investing, but also in compliance. Having a good understanding of the financial and legal requirements involved in an SMSF is vital, as there’s less regulatory oversight and less access to government compensation when things go wrong.  

APRA-regulated funds have professional investors and advisers helping to make decisions, so members can be less hands on with their super. SMSFs mean ongoing management and engagement, which can be time-consuming and challenging. 

How much does it cost to run an SMSF?

While SMSFs offer flexibility and control, it’s important to understand the costs involved before getting started. Running an SMSF typically involves a range of expenses, including set-up fees, annual accounting and audit fees; ATO supervisory levies; and ongoing administration costs. You may also need to pay for investment advice, legal support and insurance. 

These costs can vary depending on the complexity of your fund and the professionals you engage, but they often mean SMSFs are most cost-effective for larger balances, where the costs represent a smaller percentage of your total super. It’s crucial to weigh up these expenses against the potential benefits before deciding if an SMSF is right for you.