Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 239

10 checkpoints before setting up an SMSF

SMSFs are one of the success stories of our superannuation system, with about 600,000 funds in operation being set up at the rate of over 30,000 a year. Over 1.1 million Australians are trustees of their SMSF, making the structure a focal point of many retirement plans.

But they are not suitable for everyone, and here are some of the key issues to determine whether an SMSF is suitable to meet your objectives and circumstances. They have been developed to address concerns about people being pushed or rushed into an SMSF, and to protect access to the SMSF option for the long term.

1. What do you or your family want to achieve by establishing an SMSF? This explores your reasons for investigating this strategy and whether it aligns with your short-, medium- and long-term goals. There may be better alternatives that may meet your true objectives.

2. Is running a strategy via an SMSF suitable for you in terms of your experience, knowledge and available time? There are many busy executives, truck drivers and small business owners that I have talked out of running an SMSF when they can’t even find one hour in their week to schedule a meeting or engage via Skype to understand their trustee obligations, yet they think they could run an $800,000 investment portfolio.

3. What funds do you have to rollover from an existing fund and are you able to move those funds? Some people are in government, military or state funds that cannot be accessed before a certain age, or maybe a Defined Benefit Scheme that’s too sweet to leave. Can future Super Guarantee contributions be redirected to an SMSF as some employers have a mandated fund under enterprise bargaining agreements? Are there high exit fees or underlying investments that are not liquid?

4. Have insurance needs been adequately identified and addressed for your future protection? Consider the current insurances and do a needs analysis to see if they should be maintained, altered, replaced or cancelled.

5. Are you clear about trustee responsibilities? You may need to commit to more education before setting up the SMSF. Urgency to set up a fund does not remove your duties.

6. Do you appreciate the costs of setting up and the ongoing expenses of administering an SMSF as well as costs related to specific strategies you want to undertake. This includes fees associated with advice, investments, establishment, legal and administration?

7. Have you done a complete cost versus benefit analysis of an SMSF? Are you fully informed or more influenced by a friend or adviser who may have other motivations than your best interests?

8. Have you developed an SMSF investment strategy that is compliant and will help to achieve your objectives? Your expectations need to be grounded in reality, not some magic long-term excess returns based on a few myths.

9. Will the SMSF engage in borrowing or gearing, and what is a reasonable level of gearing in your circumstances based on your retirement plans and analyse the affordability of the gearing strategy?

10. How will the SMSF be administered and which professional services will you need, including financial advice, investments and legal? Have you chosen software that will minimise the administration and reduce costs, and make the work involved easier, especially for monitoring performance and preparing reports at tax time?

They’re not for everyone

Don’t underestimate the time and knowledge required. I hesitate to mention one client who said he could do his research on his mobile phone while driving to work. Or the couple who felt they were ‘property experts’ because they had four Queensland regional properties, having never visited any of them or done more than a cursory Google search. They were headed for a low income, negative capital growth portfolio. On asking for property inspection reports, we found they were also up for tens of thousands of dollars in repairs and maintenance over the coming years. It was agreed that their super was safer in their well-diversified existing strategy than another ‘punt’ on property in an SMSF until they learned more about property investing.

There is more to setting up and managing an SMSF than many people realise, and the process requires the right strategy at the right time to secure future financial security.

 

Liam Shorte is a specialist SMSF adviser and Director of Verante Financial Planning. This article contains general information only and does not address the circumstances of any individual. This article draws on a circular issued by The Financial Ombudsman Service.

8 Comments
Steve M
February 08, 2018

Liam provides some sensible advice about considering whether a SMSF is right for you before starting one. (Thanks - great article!) David Owen raises the point I was going to make about an exit strategy from managing the SMSF. I have to admit that alternative retirement strategies is a huge area of ignorance for me. An area that Cufflinks could explore is - what are the alternatives? David and Gen Y mention wrap strategies, but I have not seen any articles that cover these types of products. I spend a lot of time on my SMSF and I do enjoy managing my own money, but I know the time will come when it is too difficult - then what? How do people find the income stream products that will suit them, if not in a SMSF?

SMSFCoach
February 10, 2018

Steve M, you could look at the retail Super Wrap option from any retail provider and AustralianSuper and other Industry funds offer similar DIY options even in Pension phase. You should also consider the option of switching your SMSF to a Small APRA fund with a professional trustee once you feel it is getting too much. That way you can retain your portfolio, still have some control but have the compliance Managed for you.

Gen Y
February 08, 2018

Too many people continue to be pushed into SMSFs unnecessarily by their accountants. I have plenty of friends (mid 30s) who have been told by their accoutant they need to be in a SMSF with their aligned adviser then putting them in a portfolio of shares and managed funds... something they could have got in a Wrap product for 30 basis points.

Meanwhile ASIC would prefer to investigate the obvious that Insto advisers are aligned to their i. House products...

SMSFCoach
February 10, 2018

I agree GenY, a wrap account is suitable for most who just want to control a portfolio of top 300 shares and Managed funds. There has to be other client led needs or objectives for a fund not just an accountant’s “you’ve got enough to run an SMSF”. I shut down a number of these annually. Most licensed SMSF advisers don’t want to see people in SMSFs that are not suited to running one as that puts the future of the sector at risk.

Len the aussie
February 08, 2018

SMSF seems to be the buzz word if you can afford commercial property out of your fund and lease it out as the rents go into the fund and tax free and you spend it if possible,

watched a buddy trying to keep up with it and I think he is getting too old to enjoy it :)

David Owen
February 08, 2018

We must also factor in the fact that, as people age, their ability to properly manage and administer a SMSF reduces. This particularly the case if one of the members/trustees falls ill or worse. It horrifies me when I see advisors who recommend to clients who are say 65 or thereabouts to set up a SMSF so that they can "control" their superannuation.

My wife and I have has our SMSF since 1980. Have we really benefitted from it? I doubt it. At long last, we are now in the process of closing it down and utilising off the shelf Wrap accounts. Lower cost and no compliance issues.

PS I am a financial planner of some 30 years experience.

Graham Hand
February 08, 2018

Hi Frank, I agree that some of the reasons for having an SMSF are overstated, especially reducing costs, as there are many institutional funds which cost less than 0.2% to do everything, and it would be difficult for most SMSF trustees to beat this. But where an SMSF has unique advantages is the ability to put almost any asset into super, such as unlisted bonds, unlisted property and alternatives not on platforms.

Frank
February 08, 2018

The strongest reason to have an SMSF is if you enjoy managing your own money. I'll bet the majority of SMSFs lose money if you costed in all the time people spent fiddling and trading and learning the rules and administering them. Otherwise, they should be enjoying life on other things. Let's talk about returns AFTER all costs involved in managing them.


 

Leave a Comment:

     

RELATED ARTICLES

5 more mistakes to avoid with SMSFs

Latest SMSF updates from the ATO

Asset class and portfolio management skills are different

banner

Most viewed in recent weeks

A hard dose reality check on vaccines

With 160 programmes underway and billions of dollars spent on COVID-19 vaccines, investors are drawn to optimistic news. However, the company that has developed most new vaccines has a sober view.

Six ratios show the market is off the charts

There is an infinite variety of financial charts an investor can watch, with many spurious claims about factors and causality. But here are six common charts that are at historical extremes.

After 30 years of investing, I prefer to skip this party

Eventually, prices become so extreme they bear no relationship to reality, and a bubble forms. I believe we are there today, not for all stocks but for many in the technology space.

What super changes should you know from 1 July?

A few rules have changed, one is caught up in the legislative stage, and it's worth revising a couple of others. Around the age of 65, there are specific super opportunities every retiree should know.

How we have invested during COVID-19

With signs that the economic recession will not be as deep as first feared, many companies will emerge strongly with robust business models. Here are the sectors with the best opportunities.

Too much, too fast: four ways we are investing now

There are plenty of reasons for pessimism as the market has recovered too strongly, but quality stocks with good earnings growth and strong cash generation and balance sheets are still available.

Latest Updates

Investment strategies

After 30 years of investing, I prefer to skip this party

Eventually, prices become so extreme they bear no relationship to reality, and a bubble forms. I believe we are there today, not for all stocks but for many in the technology space.

Investment strategies

Citi’s Gofran Chowdhury: clients don’t think the worst is over

Citi's clients tap into their own views to find investments that suit their portfolios, often working across global boundaries. It's a search for solutions in a world with no risk-free returns.

Shares

Two thematics to watch in volatile times

COVID-19 is delivering winners and losers, and buying a well-positioned company while shorting one with worse prospects can provide returns while managing the downside of an overall market correction.

Investment strategies

Four ways to reduce the generation blame game

There's a popular view that generations are 'at war', but is it really the case that generations are more divided than ever before? If so, what's causing it? Why now? And how can we move forward?

Gold

Is gold a growth or defensive asset?

As uncertainty intensifies around geopolitics and markets, gold has rallied strongly in 2020. While most investors think of gold for price growth, does it deliver defensive features to a diversified portfolio?

Superannuation

Large super funds struggle to match index in Aussie equities

With the Retirement Income Review now in Treasury's hands, will the 'fact base' establish whether large super funds do better than the share index? The public evidence is not impressive.

Economy

The green lining of COVID-19: a time for change

With historic falls in greenhouse gas emissions during the COVID-19 pandemic, we have a unique opportunity to construct a recovery that ensures a stronger economy while minimising carbon emissions.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.