Advantages and Disadvantages of SMSF

 

Self-managed super funds (SMSF) have gained popularity over recent years. There are just so many reasons for SMSF to thrive in this day and age. Setting up an SMSF has proven to be a great way of preparing for retirement. It ensures that your hard-earned money is wisely invested and that you can enjoy it for as long as you need. Your children and future generations can even benefit from your SMSF when you pass away. However, having SMSF has its pitfalls. It certainly isn't easy managing your own fund and investments. Why choose an SMSF when you can let experts handle everything for you? Let's have a look at the advantages and disadvantages of SMSF to find out if it really is the right choice for you.

SMSF ADVANTAGES:

1. It Lets You Buy Or Sell Assets Quickly

Buying or selling assets will be a lot easier and faster if you have an SMSF. Trustees can instantly change their investments without experiencing any frustrating delays that usually happen with large super funds. Since you control your investments, you don't have to request and wait for your investment changes to be reviewed and executed.

2. It Helps You Save Money

Among the benefits of having an SMSF is that it can help you save money, especially if your SMSF has a large balance. This is because the administration fees of an SMSF are usually fixed, regardless of the fund balance. Additionally, SMSFs do not have to pay fees that usually come with having someone else manage your investment funds.

3. It Allows You To Hold Your Business Premises

Holding your business premises in an SMSF is great for tax-effectiveness, asset-protection, succession planning, and security of tenancy. It can ensure continuity of tenure for your business, with no worries about tenant policies and rental arrangements. The rent you pay to your SMSF is tax-deductible to your business and you only need to pay concessional tax on the rent. Additionally, fund-held business premises will not be accessible to trustees if a member gets into future financial troubles.

4. It Enables You To Make Unique Investments

An SMSF enables trustees to have unique investments that might not be available with most large super funds. With an SMSF, you can invest in unlisted shares, art, antiques, coins, wine, classic cars, boats, and other exotic or unusual investments.

5. It Provides Better Estate Planning

SMSF members generally have better and more flexible death benefits. An SMSF member's death benefits can be paid to a beneficiary as a pension rather than a lump sum. Funds can also be distributed to dependents in a tax-effective manner. A member aged 60 or older can also withdraw benefits at any time, before death, to avoid paying death benefits tax. Through these flexible arrangements, trustees can better plan their estate without the risk of bankruptcy and large monetary losses.

SMSF DISADVANTAGES:

1. It Is Time-Consuming And Labour-Intensive

Operating an SMSF can be time-consuming and labour-intensive, especially if the trustees have poor knowledge of running a fund. You will need to deal with administrative tasks and every little investment decision for your assets and investments. You also have heavy responsibilities such as preparing annual financial statements, filing for a tax return, and conducting an independent audit. Even if you can hire a financial expert to do these tasks for you, you will still have to dedicate some of your time to coordinate and oversee all their activities.

2. It Requires Investment Knowledge

Before even considering running an SMSF, trustees should have a thorough understanding of proper investment practices. They should also understand how investment costs and taxation work. Basic knowledge of investment will help protect trustees from being deceived by financial advisers or getting themselves in financial trouble. As a trustee, you should remember that you are directly responsible for whatever happens with your fund. Having adequate knowledge on investing can help you save, and even multiply, all your retirement savings.

3. It Faces The Risk Of Inconsistency

Many people establish SMSFs with great ambitions but lose interest over time. It could be because of negative turnouts on their investments or its members have not been able to reach their expectations. Other times, it could be because its trustees have aged and become physically and mentally unable to manage their funds. Furthermore, when members die, their beneficiaries might have no interest in continuing the investments. When this happens, SMSFs are in danger of failing, unable to fulfil their responsibilities, or even go bankrupt.

4. It Can Get Expensive

Without adequate know-how, SMSF members will be forced to outsource administrative services and financial advice from a professional. They will have to pay people to do their responsibilities for the SMSF to thrive. Also, if the fund is not invested wisely, there will be a higher risk of loss. Trustees might need to shell out more money for their investments to move forward. Furthermore, SMSFs also have to pay higher insurance costs than public funds since public funds have more members and pay bulk premiums.

5. It Runs The Risk Of Poor Diversity

Most people set up SMFs to buy a single valuable asset. This means the success of the investment solely depends on the performance of one asset. SMSF members should have an appropriately diversified investment portfolio so they can spread their risks and increase their potential for returns. Without knowing this, there will be lower chances for success and might even go bankrupt.

With these advantages and disadvantages of SMSF in mind, you can make a calculated decision on whether or not establishing an SMSF will be the right decision for you and your family. For a better understanding of the pros and cons of SMSFs, talk to a financial expert. Make sure your hard-earned retirement fund is properly invested, whether it is with an SMSF or a large public fund.