Is an SMSF right for you?

As the year comes to a close, it is not unusual for people to reflect on their financial plans for the upcoming year. At North Advisory, we have been speaking to several individuals and business owners about their retirement planning and working through the most advantageous structure to take them forward.

Self Managed Super Funds (SMSF) are a popular topic of discussion when I meet with clients. It is not surprising, considering the widespread use of these retirement vehicles in Australia. It is estimated that approximately 650,000 SMSFs, representing over 1.2 million members, are active nationwide. As a financial advisor, I cannot dispute their popularity or the advantages they provide; however, it is critical to ensure an SMSF is the most suitable structure for your circumstances before establishing one.

The big drawcard of an SMSF is the control. Unlike in retail or industry super funds, where you’re one of many members, an SMSF puts you in the driver’s seat. You get complete visibility into your fund’s performance, transactions, and costs. Many of our clients want to be hands-on with their super. The transparency enables them to track every contribution and expense, making real-time decisions about their investments. SMSF trustees can invest in almost anything (provided it’s legal and in line with superannuation rules) from ASX-listed shares and international equities to real estate, private business ventures, and even physical commodities like gold or collectibles.

With an SMSF, you can tailor your investment strategy to suit your specific goals and risk profile. For those who value being actively involved and knowing exactly what’s happening with their retirement money, this level of control and insight is a significant benefit.

When clients come to me about starting an SMSF it’s my responsibility to work through their motivations and financial circumstances to ensure an SMSF is the right investment. Asking questions and getting to know the client are crucial steps in the process.

Firstly, I need to know how much the client wishes to invest. This is a critical question because cost-effectiveness is a key consideration. There’s no legal minimum balance required to set up an SMSF; however, running one involves fixed costs such as annual accounting, auditing, and compliance fees. To ensure they get value for money, Australian regulators suggest that a combined super savings of around $200k – $250k may be a sensible minimum for an SMSF to be cost-effective.

An SMSF can have up to six members, typically family members pooling their super, which can help them reach a higher combined balance and achieve economies of scale. While there are other factors to consider, such as fixed fees for SMSF rather than a percentage of the superannuation balance, which is traditionally charged by retail and industry funds, the initial balance remains an essential factor to discuss. If you currently have only a small amount in super, I may suggest building it up within a low-cost industry fund first or joining with other family members, rather than jumping straight into an SMSF that may not justify its costs.

While the benefits of control and flexibility are attractive, an SMSF also comes with obligations. Essentially, you become the trustee of your own super fund, with legal responsibility to keep it compliant. SMSF trustees must, for example:

• Maintain compliance and records: You must follow all superannuation laws, e.g. the sole purpose test that all investments are for retirement benefits, and keep accurate records of the fund’s activities.
• Prepare annual reports and audits: Each year, an SMSF has to lodge a tax return and financial report, and undergo an independent audit to verify compliance.
• Handle administration and updates. Trustees must stay informed about contributions, rollovers, benefit payments, and relevant regulatory changes. You need a documented investment strategy and should review it regularly.

Failing to meet these duties can lead to penalties. The ATO can impose fines or even declare your fund non-compliant, which has heavy tax consequences. Notably, many compliance breaches occur in the first few years of new SMSFs, often due to inadequate documentation or overly speculative investments. This is why financial literacy and commitment of time are important. Professional advisors can assist with the heavy lifting of paperwork, accounting, and compliance. I typically assess whether a client has the necessary financial knowledge or is willing to seek professional guidance before recommending an SMSF.

SMSFs are best suited for individuals who are prepared to be engaged with the entity. If you prefer a completely hands-off approach to your super, an SMSF may not be the right vehicle for you.

An often overlooked aspect of superannuation is what happens to your super when you pass away. What is not widely understood is that your super, including an SMSF, doesn’t automatically get distributed via your Will. Instead, it is distributed according to superannuation laws and the fund’s trust deed, typically to dependants or as directed by any binding nominations you have in place. This means that if you set up an SMSF, you need to make conscious plans for your beneficiaries. For instance, you might put in place a Binding Death Benefit Nomination that instructs the SMSF trustee, which could be your successor or co-trustee, exactly who should receive your super balance in the event of your death. Without such measures, there’s a risk that your super could be paid out in a way you wouldn’t have wanted, or cause disputes among family members.

One benefit of SMSFs is that they can be a valuable tool for estate planning when used effectively. Because you have control, you can structure your SMSF to provide for your family in a tax-effective manner. SMSFs also allow for multi-generational participation; parents and adult children can be in the same fund, which can aid in intergenerational wealth transfer strategies. I work with clients on intergenerational wealth strategies and see SMSFs as an ideal solution for tax-effective estate planning.

However, the key is to have those nominations and agreements documented. The initial discussion will ensure that you’ve at least considered who you want to benefit from your super and are aware of the need to formalise those wishes within the SMSF structure.

SMSFs can be a fantastic retirement vehicle for the right person; they offer investment choice, greater control over fees and tax strategies, and the ability to build a family legacy within your super.

It does require commitment, diligence, and resources. My approach is to ensure alignment between a client’s goals/capabilities and the SMSF structure before proceeding. In an initial consultation, I explore all the questions, essentially gauging your “SMSF readiness.” Positive answers to these questions tend to indicate that you may be ‘ready and able’ to commit to a Self-Managed Super Fund.

On the other hand, if it becomes apparent during this process that an SMSF isn’t suitable, I will be happy to guide you toward alternatives that better fit your situation. An SMSF is not a one-size-fits-all product. It’s recommended when it genuinely aligns with a client’s best financial interests. If you’re considering an SMSF, always seek out an advisor who will challenge and verify your reasons so that if you do embark on the SMSF journey, you’ll be in the best position to maximise its benefits and secure your financial future.

Our goal is to help you focus on long-term growth and wealth preservation.

Cayle Petritsch, Director and Wealth Advisor, is a leading financial advisor on Sydney’s North Shore. He has helped many Australians maximise their financial position and leverage opportunities, leading to sustained and profitable wealth accumulation.

Contact Cayle today.