There’s a lot of talk in the realm of personal finance about “SMSFs” or self-managed super funds. There are already more than a million Australians who have opened one because, they say, a SMSF allows you to choose your own path to financial freedom. But is that all there is to it? Is it all upside when it comes to these funds? We want to take a closer look at SMSFs, what makes them tick, and the pros and cons of having one.
What is an SMSF
Let’s first be clear on what we’re talking about. A self-managed super fund (SMSF) is a private superannuation over which you have personal and private control. You don’t have to run it alone, however. You can bring in up to 6 members, who can be directors or trustees, all working together to run this fund for your benefit. With that control, however, also comes full responsibility for overseeing all super and tax laws.
Pro – More Control
You and your members have complete control over your fund. There is no one else informing you of the path you should take, nor do you have to convince others to follow your path. Whatever route you’re hoping to take, you can do so. The main advantage here is the ability to take on more risk when you and your members agree it’s worthwhile. This is much harder to do in an ordinary super fund.
Pro – You Can Make Decisions Faster
Since you are in control, you can also make those critical decisions much faster. That’s so important in the world of finance and investing, of course, because so many opportunities can otherwise pass you by in the blink of an eye. What starts as an unmissable chance one evening turns into a done deal for others who took that chance by the next morning. You often have to act fast, and an SMSF gives you that ability.
Pro – Lower Operating Costs
For most SMSFs, the ongoing operating expense ratio is only around 0.5 percent. That’s quite different from running bigger funds in other ways. In fact, the bigger you make your SMSF, the lower you can make the operating cost ratio.
Of course, not all in the world of SMSFs is rosy and perfect. Let’s now look at some of the downside:
Con – No Access to Government Compensation Schemes
We’ve mentioned in the Pros that being able to take on additional risk is an advantage, and it is, but responsibility for that risk also sticks with you. When you’re in an SMSF, there’s no access to government compensation in the event that you lose money. Even if you do everything right, and end up losing money through absolutely no fault of your own or the other trustees in your SMSF, you still end up holding the bill at the end.
Con – Requires High Investment of Time and Energy
Given the first con we just mentioned, this second one becomes a must. Running your own SMSF takes up a lot of your time and energy. After all, you’re responsible for all its activities, and you won’t be compensated for losses, meaning that you need to keep your wits about you at all times, and you and your trustees need to be on the ball 24/7. Keeping close tabs on everything is essential, and can become overwhelming for some.
Con – Less Access to Dispute Resolution Bodies
Finally, when you’re running an SMSF, it’s not just compensation schemes you have no access to, your access to dispute resolution bodies that would otherwise provide competent legal aid in those difficult situations that called for it. You would therefore be faced with a very real prospect of losing a great deal of money in paying for legal aid to resolve disputes.
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