Self-managed superannuation funds (SMSFs) give people greater control over their retirement savings. But setting them up and maintaining them can be complex, often requiring expert advice to get the best investment outcomes and meet regulatory obligations.

Data from the Australian Taxation Office (ATO) reveals the SMSF sector is very large and still growing. There was almost $1 trillion invested via SMSFs in retirement assets, as at 31 March, 2024, up from $856.7 billion a year earlier.

The data also showed that SMSFs had invested a record $141.8 billion in Australian residential and non-residential property investments in the March 2024 quarter and a near record $145.1 billion in cash and deposits, or around 15 per cent of total assets. Another $287.1 billion was invested in Australian and overseas shares, or around 31 per cent of total SMSF assets.

The benefits of SMSFs is that you have more control and flexibility over your savings and can respond to change. However, setting up a SMSF also involves significant responsibilities to ensure the fund’s compliance with regulations as well as its effective ongoing management.

Professional advice is essential when establishing an SMSF due to the significant responsibilities involved. There are five key areas where expert guidance is required:

  1. Understanding legal and regulatory requirements: SMSFs must comply with the Superannuation Industry (Supervision) Act 1993 (SIS Act), including the sole purpose test, investment restrictions and the need for an investment strategy. A key requirement is that the assets are genuinely used for retirement, with strict instructions on related-party investments, and that funds are not withdrawn before retirement age.
  2. Trust deed and fund structure: The trust deed outlines the rules for operating a SMSF. It needs to be comprehensive and comply with all legal standards. Additionally, guidance on the fund’s structure, including the roles and responsibilities of trustees, must be clearly articulated.
  3. Investment strategy development: One of the most critical components of a SMSF is its investment strategy, which must reflect the retirement objectives of the members considering their risk tolerance and liquidity needs. A robust investment strategy is critical, measuring risk tolerance, and it should be reviewed regularly so that the fund continues to meet investment goals.
  4. Administrative responsibilities: Managing an SMSF involves considerable administrative work, including record-keeping, reporting, and lodging annual returns, within all relevant deadlines. Professional support can ensure that the correct documentation is mentioned and prevent costly penalties for non-compliance and streamline the fund’s operations.
  5. Taxation and auditing: SMSFs are subject to specific tax rules and must undergo an annual audit by an approved SMSF auditor.

Alternatives to SMSFs

While SMSFs offer greater control over investment choices and flexibility, they may not be suitable for everyone. Alternatives such as retail, industry, and public sector funds, as well as MySuper products, offer viable options that provide professional management, lower complexity and peace of mind.

Here are some options for those who might find setting up and operating a SMSF too complex:

  1. Retail superannuation funds: Retail super funds are managed by financial institutions and offer a wide range of investment options and many offer features such as insurance and financial advice. These funds are suitable for individuals who prefer professional management and are not interested in directly controlling their investments.
  2. Industry superannuation funds: Industry super funds are non-profit funds well known for their lower fees and strong performance. These funds are managed by a board of trustees, including employer and employee representatives, ensuring members’ interests are prioritised. Members benefit from collective investment power, which can include lower fees on investment products.
  3. Public sector superannuation funds: Public sector funds are designed for government employees and offer benefits similar to industry funds.
  4. MySuper products: MySuper is a default superannuation product introduced by the Australian government to simplify super choices. They are ideal for individuals who prefer a hands-off approach to their superannuation but still want a cost-effective solution.

For anyone thinking about setting up a SMSF or another option, it is essential to consider your financial situation, investment knowledge and retirement goals when deciding which superannuation strategy for you.

It is a major life decision, so seeking professional advice is strongly recommended.

This article was published in the Spring 2024 issue of Financial Times.