What are the disadvantages of SMSF?
There are many reasons why people choose to setup a self-managed superannuation fund (SMSF). Like any choice you come across there are advantages and disadvantages. When choosing a SMSF vs an industry or retail super fund you need to ensure the disadvantages do not outweigh the advantages. Keep in mind that if you do not have the time, do not want to be involved in choosing the fund’s investments then a SMSF may not be for you.
A SMSF is a self-managed fund. It is a choice to complete an SMSF Setup and then the ongoing responsibilities of operating and managing an SMSF. You cannot simply setup and forget. You need to educate yourself and become knowledgeable about your trustee responsibilities and have some understanding of how the Superannuation Laws and Regulations (SISA) affect your fund.
This can seem daunting, but you can employ professionals such as SMSF specialists, financial advisers, accountants and other administrators to assist you with your responsibilities.
The ATO have a lot of very detailed publications and videos on their website to educate members and SMSF trustees. SMSF Australia also include a lot of materials on our website under “RESOURCES” tab and a BLOG to assist you with understanding the SISA rules.
Next, we will look at the detailed disadvantages that we identify for trustees although keep in mind like any list this is not necessarily every single downside imaginable but rather the core ones we think of primary importance to consider.
Responsibility
You are responsible for:
- how the fund is operated
- compliance with SISA, tax laws, ASIC and the governing rules of the SMSF
- engaging an SMSF accountant to lodge the annual SMSF Tax Return, potentially business activity statements if GST registered, reporting pension movements as part of a member’s transfer balance cap (TBC), annual ASIC statement etc.
Investment Decisions
Ongoing investment decisions and performance are the responsibility of the trustee although trustees can choose to engage with qualified financial planners. With or without the support of a financial planner the trustee is required to prepare and implement an investment strategy and to continually review the fund’s investments to ensure the strategy is meeting the retirement goals of the members.
Costs & Insurance
The fixed costs involved in operating a SMSF are generally higher in SMSFs which have small member balances but does tend to reduce proportionally when the investments grow significantly. Depending on the size of your fund an SMSF may or may not be a more expensive option.
Travelling Overseas
If you decide to work overseas or live in a foreign country for a few years, or permanently live overseas, you must consider how this can affect the compliance of your SMSF. A superannuation fund must be an Australian resident which can be put in jeopardy when the members, who are also the trustees, of a SMSF go overseas for an extended period. This is not an issue in a non SMSF fund as the trustee is an independent APRA regulated entity and a member is generally able to make voluntary super contributions whilst living overseas.
To recap
- the responsibility of operating and managing a SMSF is you but preparing accounts, obtaining investment advice and carrying out other administration activities can be outsourced to a professional
- you must understand the laws and spend some time educating yourself which can be done using ATO resources and SMSF Australia’s resources
- ensure the disadvantages of running a SMSF do not outweigh the advantages