Is a SMSF worth the effort?

A lot of clients come to us looking for more flexibility and control over their superannuation investments. For people who are comfortable with a higher level of risk and want to grow their retirement savings through diverse investments, a Self-Managed Super Fund (SMSF) can be an alternative vehicle to boost their retirement income compared to a traditional retail or industry superannuation fund. When used correctly, an SMSF has many benefits, especially for those who want a personalised approach to their retirement savings.

Additionally, SMSFs provide unique opportunities for diversification. Unlike retail or industry funds, which often limit your choices to a predefined set of investment options, SMSFs let you explore alternative assets such as private companies, unlisted shares, residential and commercial property and alternative investments such as cryptocurrency, gold or even art. This flexibility allows you to build a customised investment strategy that aligns with your financial aspirations and risk appetite.

Another notable aspect is the potential for tax efficiency. SMSFs can offer tax planning benefits, particularly around capital gains tax. Trustees have the flexibility to time asset sales to optimise tax outcomes, a luxury not typically available in larger, pooled superannuation funds. SMSFs can also facilitate strategies to minimise tax in the pension phase, leveraging concessional tax rates to potentially enhance retirement savings.

An SMSF gives you the agility to respond quickly to changing market conditions. You are not beholden to the processes and decision-making timelines of large superannuation funds. Instead, you can promptly adapt your investment approach to mitigate risks or capitalise on emerging opportunities.

While there are benefits to a SMSF with greater control comes more responsibility. Setting up and managing an SMSF requires a significant time commitment and a comprehensive understanding of superannuation laws and compliance requirements. This is why seeking advice from financial advisors and accountants who specialise in SMSFs is essential. Professional guidance helps navigate regulatory complexities, optimise your investment strategy, and ensure that your SMSF remains compliant.

In our last article, research suggested that SMSF members held an average of just over $797,000 at retirement, well above the retirement standard of $595,000 for a single person or $690,000 for a couple. The questions asked in the past centred on initial fund balances, set up costs, and ongoing maintenance fees of a SMSF.

Recent research from the University of Adelaide provides compelling insights into SMSF performance. The study, “Understanding Self-Managed Super Fund Performance,” analysed data from over 318,000 SMSFs between 1 July 2017 and 30 June 2019. The findings challenge previous assumptions about the necessary capital to achieve competitive returns.

The study found that a typical SMSF’s performance improves significantly as the fund balance approaches $200,000. At this threshold, SMSFs’ investment performance is comparable to much larger funds. Contrary to earlier beliefs, the research revealed no noticeable changes in performance patterns as fund sizes approach $500,000. This suggests that SMSFs with balances under $500,000 do not necessarily deliver materially lower returns compared to larger SMSFs.

Complementary research by the actuarial firm Rice Warner in late 2020 found that SMSFs with $200,000 or more balances are cost-effective compared to industry and retail funds. This supports the idea that an SMSF can be competitive in cost and investment performance with much larger superannuation funds.

While the potential for higher returns and greater control is attractive, it’s important to recognise the increased variability in investment outcomes with SMSFs. The University of Adelaide’s research indicates that SMSFs exhibit greater investment return variation than larger funds. This variability underscores the importance of professional financial advice and a sound investment strategy.

Before considering an SMSF ensure your current fund has at least $200,000 to be cost-effective and be prepared to comply with super and tax laws. Managing an SMSF requires time, knowledge, and a hands-on approach. You must consider the diversification of your investment portfolio. Concentrating investments in one area can increase risks, highlighting the importance of a well-balanced strategy. Novice investors should start with a mix of high-growth and stable investments to balance potential returns against risks. Regularly reviewing your investment strategy with a financial advisor can help you stay aligned with market trends and your long-term goals.

It is highly recommended that you seek qualified advice. Engaging with financial advisors, accountants, and other professionals can help you navigate the complexities of managing an SMSF and maximise your investment outcomes.

Setting up an SMSF is a significant financial decision that should not be taken lightly. While the benefits of flexibility and control are substantial, they come with responsibilities and risks. Investment knowledge and time, cost and administrative effort and being committed for the long game are challenges that individuals need to way up before starting the SMSF journey.

North Advisory wealth specialises in SMSF Management, wealth management, superannuation, and estate planning. If your considering a SMSF contact our team today for a no-obligation discussion.