There are all sorts of reasons to build your super through a SMSF – control, choice and involvement to name a few.
But as a trustee of a DIY fund, the buck stops with you as your responsibilities cannot be delegated. That has consequences.
Say you’re off on a well-deserved overseas trip. While you’re away, your SMSF’s annual return needs to be lodged with the Tax Office. And now you have to worry:
- Will the accounts be ready?
- Will the fund audit be complete?
- Will you have a trustee meeting in time (where you must review the fund’s investment strategy - even if you don’t think it will change)
- Will you have the minutes in place?
It’s not just the paperwork
While SMSFs have boomed in recent years, some SMSF members are starting to reassess their benefits. While fund administration is usually outsourced to specialist SMSF administrators, the legal responsibility still rests with you as a trustee. That level of responsibility – and the associated effort and paperwork – can be onerous. But there may be reasons to move your retirement savings to a mainstream fund for strategic rather than lifestyle reasons. Estate planning is a good case in point.
Estate planning can be exacting
Estate planning is important because you want your wealth to go to the right people in the most efficient and tax effective manner.
So wouldn’t it be nice for your loved ones to get not only your death benefit when you die but an additional benefit known as an anti-detriment payment? Not all funds, however, offer this payment and while it’s not impossible for SMSFs to pay anti-detriment payments, it is difficult.
SMSFs have other estate-planning problems. Without careful planning and execution, there is the risk that when you die control of your fund could end up in the wrong hands with the result that your entitlements go to the wrong person(s).
In some recent court cases intended beneficiaries have ended up being bitterly disappointed. In one case, a binding death-benefit nomination failed as it did not follow the strict requirements of the fund’s trust deed. Managing the increasingly common problem of lost mental capacity can be a real problem in the SMSF space (and almost one in 10 people older than 65 have dementia).
Measure the pros and cons
Of course there are excellent reasons for running your own fund – but as with any major strategic financial decision you need to be very clear about what they are.
Generally, it should be all about what other funds can’t offer. For example, a doctor who wants to use their super money to buy their practice premises. As mainstream funds cannot deal in direct property, this is the logical domain of SMSFs.
However, there are many investors who no longer have a truly ‘‘unique’’ reason for running their SMSF. It may be that the financial benefits are no longer there or that the attraction of day-to-day money management has worn off. Or simply that options that used to be the domain of SMSFs are now available in mainstream funds.
Once you start to consider the strategic questions, you may ask whether your savings even need to be in super after retirement. Too many SMSFs have low balances. Why incur fees running a super fund for a tax-free retirement income when this may be achieved investing outside super, given the amount that can be earned tax free ($32,279 for singles and $28,974 for couples) with the seniors and pensioners tax offset?
In short, the SMSF choice is never a black and white one – and a careful reappraisal of your situation and objectives can be rewarding.
This is an edited version of an article that first appeared in The Australian Financial Review on 5-6 September.