SMSF stands for Self-managed super-fund. It simply refers to a superannuation fund where you take personal and more direct control of how your retirement money is invested. This kind of arrangement can only have a maximum of four members as trustees.
In Australia, a compulsory superannuation scheme has existed since 1991. However, the SMSF has become quite popular, and it’s now estimated to be representing nearly 99% of all super funds.
In this article, we discuss several things you need to know about the self-managed super-fund
1. Learn the SMSF Landscape
There several legal requirements that guide the SMSF landscape, and it’s important that you learn how to navigate each phase. To start with, the basic aspect of SMSF has to be providing benefits to each member. There are different scenarios where members or their dependents can access their funds, also known as super. They include:
- Retirement of a member
- Upon reaching the agreed age where they can be allowed to access the funds
- Legal dependents get the benefits upon the death of a member
There are also limitations related to age as well as individual contributions. The SMSF laws also offer guidelines and restrictions on how investments are to be done.
In general, as Financial Mappers emphasize, it’s important to familiarize yourself with the SMSF landscape and get to understand the various provisions to underline smooth operations.
2. Gather your team
The question of time as well as expertise to run an SMSF should be a foremost consideration. Basic requirements include administration, picking an investment as well as tax management.
Team members should think around their ability to handle the fund or better still find a specialist to help them navigate various issues.
Whereas you can set up an SMSF as sole trustee, you still have an option to include three more people. This makes a team of four, which are all allotted assets in accordance with agreed guidelines. The collective funds can be invested according to allotted assets or as a whole, which gives members an opportunity to invest in higher asset values. Having more members on board helps to reduce the cost of running the SMSF.
3. Take the Responsibilities involved
There are several responsibilities that members need to be aware of, especially as trustees, such as preparing and lodging annual tax return with the Australian Tax Office (ATO)
- They also have to meet all the relevant legal observations
- Putting in place an investment plan
- Ensuring the fund’s assets is in accordance with a market value
- Having relevant documentation on members’ assets as well as investment decisions
At the point of establishing the SMSF, trustees or directors (incases of a corporate trust) are tasked with the day-to-day running of the fund. This gives them the responsibility to manage and make decisions concerning the SMSF. However, you can incorporate professionals in the management of this fund for more success. An account, tax agent of a financial advisor can all be brought on board under the fund’s trust deed.
4. Your investment Strategy
It’s important to evaluate as many investment options as possible when setting up an SMSF. A lot of factors such as members’ age, contributions, and the general market outlook will all play a key role in determining and directing your investment options.
An important aspect to keep in mind is that the SMSF’s main focus should be allowing members or their dependents an easier retirement. Emphasis should therefore go into having assets that guarantee members the safety net they seek in their years of retirement.
5. How Much is Needed to Kickstart SMSF?
This is entirely dependent on the circumstances of your current financial circumstances. There is no consensus really on what the appropriate amount really should be, as neither the Australian Securities for Investments Commission (ASIC) nor does the Productivity Commission provide a direct answer. However, a basic consideration should be that the minimum amount should still allow the SMSF to remain financially viable. Such costs should also be considered in the face of what it would cost if you opted for a super fund scheme rather than the SMSF.
Precisely, it’s a question of how much you are willing and is available to invest in the SMSF and to run it viably.
6. Running the Funds
The SMSF is supposed to be an income-generating investment. As such, a number of factors and guidelines underlie how the income generate is allocated. One of the factors to put into consideration is an individual’s starting balance, the balances of the fund throughout the year as well as the entire proportions held by each member.
The retirement age of a member is a key factor in determining the future of the fund. For instance, if one member retires before the rest, their dues can be settled through a Pension account while other members continue to contribute to the joint accumulation accounts. In other words, the retired member can draw a pension stream while the rest of the members continue to contribute to the larger pool of the SMSF.
7. Contributing Assets instead of Cash
The SMSF arrangement allows a member to contribute assets instead of cash. This is called an in-specie contribution. Whereas all superannuation schemes allow this kind of contribution, the SMSF platform expands the categories of assets that can be transferred to it. Such assets are for investment purposes only, which means they cannot be used to settle pension funds or any other purpose.
8. Accumulation accounts and Pension Accounts
For SMSF, you can have an accumulation account and a pension account.
The accumulation account will hold your contributions, and it will be the main account you will have to maintain. This can offer you a lump sum or smaller series of payments. However, there is a difference once you reach the preservation age or 65 years because you will need to open a pension account.
If you are 65 and above or have reached preservation age, then you will need to have a pension account. With a pension account, you will be required to take the minimum amount every year, which is again set by the government. Pension accounts generally attract favorable tax considerations.
The key to the successful management of SMSF is understanding all the component requirements. From the laws to timing and making the right investment decisions, you need to get it right. Working with a financial advisor is ultimately one of the easiest ways of going around it.