What is a self-managed super fund?

An SMSF is a private superannuation fund established by an individual or small group of up to six people.

The beauty (and difficulty) of an SMSF is that the individual (you) is responsible for every aspect of managing the superannuation fund. Every member must serve as a trustee with the full regulatory responsibility and decision-making power that comes with.

We’re here to help shed light on what a self-managed super fund actually is and how to decide if it’s right for you.

You can also find a handy Checklist: Is an SMSF right for me? at the bottom of this article to help you understand if an SMSF is worth considering.

What are the advantages of a self-managed super fund?

The major advantage of an SMSF is that it gives you more control over how your super is invested. This means you research investments and  decide which assets you want to invest in  

With an SMSF, you can make investment decisions rapidly and capitalise on market changes or quickly offset losses.

Some of the other advantages include:

• Access to more investment options – an SMSF can give you more freedom to invest in assets and options that may be unavailable through other super funds.
• Tax benefits – how super is taxed is standard across all funds, including SMSFs. However, in an SMSF, if you know how, it’s possible to take advantage of certain tax strategies around things like capital gains, taxable income and franking credits.
• Estate planning – in an SMSF, you can have more control over things like estate planning. These concepts can be complex but also beneficial if implemented correctly.

What are the disadvantages of a self-managed super fund?

The biggest difficulty of an SMSF is the complexity and challenges that are part of managing your own super.

You need to understand and comply with the many regulatory requirements and taxation laws. Failure to do this, even accidentally, can result in restricted access to your super, tax penalties, significant financial fines, court orders or potentially even jail time.

According to Moneysmart, on average, members with a self-managed super fund spend upwards of 8 hours every month on associated record-keeping and administration.

Plus, the cost of managing an SMSF can also be more than expected. The ATO reported  that the median cost of running an SMSF for the 2021-2022 financial year was $9,100.

Another consideration is insurance. Most super funds offer insurance to members, and you need to decide if you will hold cover through your SMSF. According to the ATO, the costs of insurance in an SMSF can be more than other super funds.

In short, before you commit and set up your own SMSF, it’s important to be aware of the time and skill it takes to manage the fund (administration and investments), penalties for not meeting the regulatory requirements, potential investment return risk if you don’t make good investment choices, and the fees and costs.

Some people love looking after these kinds of things and some don’t - you just need to understand what you’re signing up for and whether it’s for you.

Look out for SMSF scams

Scammers tend to take advantage of the complex nature of self-managed super funds, preying on people who don’t fully understand what they are or how they work.

Oftentimes, scammers will pose as a company and offer to withdraw your super, help you control your super, or move it to a self-managed super fund.

They claim this will allow you to access your super early, even if you’re not eligible to withdraw it. This is a common scam and plays on the confusion people have around super and SMSFs.

To make sure you’re protected, learn more about spotting superannuation scams with help from ASIC.

How does an SMSF compare to an APRA-regulated super fund?

Firstly – you’re probably asking, what / who are the Australian Prudential Regulation Authority (APRA) and why is this important. APRA are the Australian Government body that oversees and regulates finance businesses like banks and super funds. Most major super funds, including BUSSQ, are regulated by APRA.

Self-managed super funds have distinct differences from an APRA-regulated super fund including:

• Control and management
• Investment options
• Cost and fees
• Regulatory responsibilities

Control and management

SMSF: With an SMSF, members are trustees and have complete control over decision-making. This is suited to people who prefer active control over their assets and have the experience to make informed investment decisions.

APRA super funds: With APRA-regulated super funds, professional trustees make investment decisions under the supervision of APRA) Individual fund members have less control over the investment strategy but, in exchange, avoid the complexities and administration required to oversee the fund.

Investment options

SMSF: An SMSF can offer more flexibility by giving you the ability to choose your own investments. For example, if it’s important to you that you’re only invested in certain companies or assets, or you want to invest more ethically, a self-managed super fund can give you this control.

Members of a self-managed super fund can invest in rare asset classes that aren’t typically found in a general super fund such as real property, collectibles, fine art, wine or precious metals. This might be your preferred strategy if your knowledge about a certain asset type allows you to make effective and strategic purchases.

APRA super funds: Alternatively, a general APRA-regulated super fund offers preset investment options tailored to specific goals (such as conservative, growth, ethical and balanced options). These options often have much greater diversification due to the size of pooled money invested, which can help manage risk. It also allows you to make broader investment decisions based on your risk tolerance and belief in the market's direction. However, specific investment choices are still managed within the fund’s overall portfolio strategy, by the teams of internal and external investment experts.

To learn more about what type of investor you are - check out our Investment Risk calculator

Cost and fees

SMSF: There are set costs for an SMSF and these typically cover things like accounting, bank and auditing fees. On top of this, many SMSF trustees also choose to pay for investment or financial planning advice, or for professional SMSF management – these fees vary greatly and impact the overall annual cost of managing the fund.

There is also the time requirement to manage the administrative side of things.

When it comes to the cost of an SMSF, consider things like:

• Are you going to be paying this all yourself or will there be a number of people in the fund this will be shared between.
• Do you expect your contributions, and investment returns to be able to offset the fixed costs and still make you the returns you want to keep your super growing each year.

APRA super funds: With APRA funds, some charge a fee that’s based on a percentage of your balance, others have set fees, and some charge a combination of both. They also usually come with default insurance cover which you pay premiums for. According to the ATO, because of the size of APRA super funds, the fees and costs and insurance premiums mays be more competitive than in an SMSF – see below for more information on insurance.

BUSSQ focuses on keeping fees and costs as competitive as we can - learn more about our fees and costs

Regulatory responsibilities

SMSF: Trustees with an SMSF assume the full responsibility for adherence to all regulatory obligations. Members must make sure they are compliant with tax and relevant superannuation legislation. There are heavy penalties for any breaches – even if it’s by accident.

The extensive record-keeping, audits and reporting required are all part of the administrative burden when you choose a self-managed super fund.

APRA super funds: Alternatively, an APRA-regulated super fund involves far less admin and liability for members as compliance and reporting are all conducted by professional trustees on your behalf. This includes the preparation of Annual Statements and reports, and holding an annual meeting for members so they can see how their account and fund is performing and all fees and costs.

Insurance^#

SMSF: In an SMSF, you must decide if you purchase insurance for your members and the premiums can potentially be higher than in other super funds.

APRA super funds: Many APRA super funds give you the option of default (automatic) insurance, and you can also personalise your cover (change it to meet your needs or cancel it). The cost of insurance is usually less as large funds can get discounted premiums.

When is an SMSF worth it?

Self-managed super funds are typically worth it if:

• You have a larger super balance to cover the fixed fees.
• You’re an experienced investor, as an SMSF can offer opportunities to invest your super how you want using your knowledge.
• You have specific goals that fall outside of what a traditional super fund offers.

However, if you are considering an SMSF, remember that it may take more time and knowledge than you think. It’s also important to ensure every member knows their responsibilities, costs and potential risks involved as everyone is liable.

Before setting up a self-managed super fund, it’s best to seek professional financial advice before deciding if an SMSF is worth it for you and also meets the needs of any other members you’re thinking of starting it with.

Who can be part of an SMSF?

A self-managed super fund can include up to six people. The most common funds have just one person or are a family of two spouses and their children.

However, they can include anyone who is not an employee of another member (unless they are related).

The more members you have in the SMSF (up to 6) can reduce the administrative burden and minimise the expense.

Consider the complex nature of an SMSF when deciding who will join you as all members are liable for legal and regulatory compliance. Difficulties can quickly arise if there is any breakdown between fund members.

Checklist: Is an SMSF right for me?

Before deciding to establish a self-managed super fund, it’s important to evaluate whether it will align with your financial goals, lifestyle and capability.

Use the following checklist to understand if an SMSF is right for you:

1. Are you willing to take an active role in managing your super fund?

An SMSF is a hands-on commitment that directly involves you in all aspects of your retirement savings. This includes researching investment opportunities, making strategic financial decisions and maintaining regulatory compliance.

The most effective SMSFs have members who are diligent about administration and intelligent about their investment choices.

2. Do you understand the roles and responsibilities of an SMSF trustee?

As an SMSF trustee, you assume significant legal and regulatory responsibilities. Every member of your self-managed super fund must be a trustee and will assume ultimate responsibility for their legal compliance.

This includes managing the fund’s assets in the best interests of its members (including themselves), adhering to tax laws and maintaining extensive records.

3. Will an SMSF help you achieve your financial goals?

Establishing an SMSF should align with your long-term financial objectives. Whether it’s maximising returns or diversifying holdings, there should be a practical purpose to your decision.

Consider if an SMSF will be effective within your broader financial plan.

Final Considerations

Overall, a self-managed super fund can be a strategic choice for individuals or small groups with experience in administration and investing who want more complete control over their super fund and its investment strategy.

The key to managing a successful SMSF is a willingness to maintain regulatory compliance and make complex investing decisions. You need to weigh up the benefits and risks of greater control, the fees and costs, and the significant time it takes to manage investment and administration.  

When considering your options, remember your financial goals and make the decision that best supports your abilities, how much time you have, and will give the best chance of achieving your ideal retirement lifestyle through super.