Keeping your nest eggs in line
With Easter upon us, it’s a good time to be contemplating our nest eggs. The majority of us will retire at some time and ideally enjoy the continuity of living standards. The earlier we make the commitment to start saving, the more likely this is to happen.
We’re fortunate in Australia to enjoy a supportive tax regime for superannuation, making it the most attractive long-term savings method. Self-Managed Super Funds (SMSF) are now the fastest growing segment of the superannuation industry. More than a million Aussies are ploughing their hard-earned super contributions into this burgeoning segment, with 30 percent of all super money flowing to SMSFs. The big question is whether to set up a SMSF or stick with a Retail (managed) Fund. In this two-part article, we’ll try to help with that decision.
What is a SMSF?
A SMSF is a private fund with a maximum of 4 members. Members must also be trustees of the fund or control the corporate trustee (i.e. be directors). Members have responsibility for the management, investment, and administration of the fund.
Many people shy away from SMSF due to the stereotype that you need to put in more effort, be financially literate and have time to keep a close eye on the market. However, this is not necessarily true as many Australian households are managing their supers through a financial services professional, which can help relieve this worry.
Typically, a SMSF involves a one-off setup fee of $2,000 and an annual fee of $2,500 – $3,500 per annum to cover accounting and auditing costs. On a fund of $100K this is as high as 3% of the fund being paid in fees. You should look at fixed costs being 1% or less.
Who is it for
- In most cases, it is to gain greater control and flexibility around saving for retirement. Age wise closer to retirement.
- To purchase their business premises if they are a small business owner, e.g. factories, warehouses, doctors’ rooms. This can be very tax effective, with rent, which is a business deductible, paid into the super fund at commercial rates.
- A large sum of money in your super.
What is involved in running a SMSF?
- If you decide to set up a SMSF you are personally liable for all the decisions made by the fund even if you get help from a professional or another member makes the decisions.
- SMSFs give you full involvement in your fund’s operation and the opportunity to make decisions around how your super is managed.
- However, as a SMSF trustee, you’re also responsible for running the fund in accordance with your fund’s trust deed, as well as super, taxation and corporations law and other general rules such as trust law.
- You will need to stay on top of your fund’s ongoing compliance requirements, including tasks such as fund reporting, record maintenance and monitoring, minutes of meetings, statutory obligations, tax, audit and actuarial reporting. You can also outsource this to a super fund manager.
Zero-tolerance compliance – non-compliance penalties for breaches are some of the most brutal that exist. Trustees who are inclined to slackness with documentation, or “doing something sneaky” are not ones you want sharing trusteeship of your SMSF. Appropriate trustees are those willing to accept and adhere to a strict compliance regime within all SIS laws.
In the next article, we will look at advantages and disadvantages of running a SMSF as every coin has two sides. If you would like to see anything particular in the next article please leave your suggestions in the comments.