The potential risks of starting an SMSF

While exploring the option of managing your own retirement savings, you will encounter many questions that require answering. I have prepared below a few topics that should help guide you on your journey.

Take your time; ask the right questions of yourself and your providers

Many people are considering starting up a new fund. From the outset, we encourage you to take your time, and carefully decide if you are prepared to commit the time and energy to ensure you get the most out of your fund. Importantly, you need to consider why you are starting up the fund. Is it to, for example, buy direct property; borrow money to invest; buy shares; or save costs on external manager fees?

Remember, superannuation is the primary retirement vehicle for many Australians, and should therefore be treated as a major decision.

Consider the additional and unavoidable costs 

You need to ensure you have enough money in your superannuation to make your fund viable, as costs play a big part in determining investment performance. We encourage you to consider all of the costs involved, and weigh those against the benefits of your running your own fund. Costs can include:

  • Corporate trustee costs: If you choose a corporate trustee, these can include setting up a company – around $500, payable to ASIC, and an annual fee for corporate trustees of around $45 annually.
  • Additional set up costs: Some SMSF administrators may charge you additionally for set up, and you also may require legal assistance in relation to the trust deed.
  • Unavoidable ongoing fees: The ATO charges an annual ATO Supervisory Levy of $259 for each SMSF ($518 for the first year, as the next year is required upfront). This annual ATO Levy applies to all SMSF's and not just SMSF’s administered by Rivkin Super. Accordingly the annual ATO Levy cannot be avoided irrespective of which provider you choose to administer your SMSF.
  • If you choose to outsource the administration of your fund, SMSF administrator fees can range from as low as $699 annually up to $5,000, plus. Additional services you may require include investing advice (whether general or personal), legal advice, and more. Please note that if you choose to open an SMSF with Rivkin Super, our general investing advice service, Rivkin Local, comes complimentary.
  • Investment fees: When you set up an SMSF you can invest in a range of different investments. It is important to understand that fees may be incurred when investing your superannuation money including but not limited to brokerage fees when investing in shares, and property purchase costs such as stamp duty and borrowing costs when investing in property. We encourage trustees seek more information about investment fees by reading the product disclosure statements and terms and conditions of the relevant investment (where applicable) or by contacting the product provider directly.

Handy tip: Calculate out what it will cost annually to run your work, and then calculate what these costs are as a percentage of what your balance is. You can then calculate what your expected yearly investment returns are to see if, after all costs, your fund balance increases in line with your expectations. Remember, there is no minimum balance required to start your own SMSF, but the lower your balance, the higher the fees become as a percentage of your balance.

Consider the tax benefits and accessibility

The government has long supported superannuation as a method to encourage people to save for their own retirement. The incentive to save through superannuation is through a generous tax environment. Superannuation is taxed at a rate of 15% on contributions and earnings. If you are over 60 years of age, any pension paid to you is not taxable in your name. This is very generous when compared with the personal progressive tax rates and company tax rates.

In return for this generous tax structure, the government requires the money to be left until retirement age, and there are several rules in this regard.

To further ensure the safety of retirement funds, the government also has specific rules and obligations for those who run their own SMSF (also known as 'trustees'). The use of debt is an example of this. It should always be remembered that superannuation is a vehicle for the accumulation of wealth for retirement and should not be used for other purposes.

Members, responsibilities and duties

The unique features of SMSFs are that each member must be a trustee and there can be no more than four members/trustees/directors of an SMSF. Trustees are responsible for protecting the superannuation assets, and as such are responsible to members in the eyes of the law (regardless of the trustees also being the members). This is different from a standard superannuation fund where you are a member, but another individual or organisation is appointed as a trustee. You should therefore be aware that setting up a SMSF increases your responsibilities as new trustee(s).

An SMSF may not be appealing if you desire to appoint more than four member/trustees to the fund. Members/trustees can leave the fund, opening up the opportunity to add new members/trustees, but the rule is no more than four at any given time. 

Investment risks

The Trustees control the SMSF and make all investment decisions for the SMSF. All financial decisions carry risk, and it is important to think carefully about how you choose your investment options to balance the level of risk against the level of financial return. You also need to be sure the investments you make are legal.

It is also important to think carefully about how you choose your investments. When thinking about how to manage the risks associated with your investment options, you may wish to consider your age, what level of risk you are comfortable with, and the objectives you have for your fund.  

We also suggest considering diversifying you assets to help control the total risk of your portfolio. Consider investing in a range of companies, sectors (e.g. banks, resources, telecommunications), geographies and asset classes. Note that diversification is a not a legal requirement but is a consideration for all trustees when making investment decisions.

Consider appointing professionals to help you

Running your own fund does mean some additional work on your behalf, however the aim of SMSF administrators such as Rivkin Super is to do as much of this for you as possible. We will work with you through the year to keep the fund running smoothly, and help address any issues as they arise. Our team will help you with documentation such as change of trustees and provide instructions on information required. We will coordinate the preparation of financial statements, tax returns and audits, along with actuarial certificates when required.

Different SMSF providers will have different benefits and features, and it is important to consider what each has to offer. Consider reading this article from the ATO.

Important: Rivkin is licensed to provide tax advice in relation to your superannuation and personal situation. Rivkin Super also comes with a Rivkin Local complimentary membership, which is licensed to provide general advice only, under AFSL 332802. If you require specific financial advice regarding your entire personal situation, you may wish to speak with a licensed financial planner.

Exit costs of existing fund

If (like most people) you already have an existing superannuation account through a fund manager, industry fund, etc., and you wish to ‘rollover’ these funds to a new SMSF, you should first check whether there any exit fees involved. Most modern superannuation providers do not charge an exit fee; however, some older funds may have a cost. These costs can be obtained by contacting your existing superannuation provider.

Read articles from the Australian Taxation Office (ATO)

Finally, the Australian Taxation Office provides a very good education foundation for those thinking about starting their own SMSF. 

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