Self-Managed Superannuation Funds (SMSFs) are a type of superannuation fund that allows people in Australia to have greater control over their retirement savings and investment choices. As a result, these investment vehicles continue to grow in popularity. According to the latest information from the Australian Tax Office (ATO), there are 606,217 SMSFs in existence with total estimated assets of $889.5 billion.
If you are considering investing in an SMSF, it’s important to apprise yourself of the benefits and pitfalls of this decision beforehand. To help make the process easier, in this article, we have outlined the benefits and risks of managing your retirement with an SMSF.
The Benefits of an SMSF
- Control: Unlike other types of superannuation funds, an SMSF gives you complete control over your investment decisions, allowing you to create an investment strategy that is tailored to your individual needs and preferences. This ability to exercise control over your fund also enables you to make changes to your portfolio as and when you choose, allowing you to take advantage of new investment opportunities or adjust your holdings based on market fluctuations.
- Freedom: In addition to control over your investments, SMSFs also offer a wider variety of options to invest in compared to other types of superannuation funds. This gives you greater freedom as an investor, allowing you to invest in alternative or unlisted assets such as private equity of infrastructure projects, provided they adhere to the regulations. You can also invest in things that hold meaning for you such as artwork, vintage cars, and other collectibles as well as assets that offer greater portfolio diversification and the potential for higher returns.
- Cost savings: Without a fund manager to pay fees to, the operational costs associated with running an SMSF are lower in comparison to other superannuation funds. In addition, the fees that are charged by an SMSF tend to be fixed, unlike an industry fund which is based on the size of the fund. This means the more your fund grows the lower its costs proportionally, saving you money. You can learn more about SMSF pricing by visiting this site.
The Risks of an SMSF
- Investment risk: An SMSF may offer you greater freedom and control over your investment decisions but this places the onus on you to research your investment options and regularly review your strategy to ensure your fund is performing well. Without the right insights and knowledge that can be provided by an experienced fund manager, you run the risk of experiencing financial losses, especially in challenging market conditions.
- Compliance Risks: SMSFs are subject to strict regulations and compliance requirements set by the ATO and failure to adhere to these rules can result in penalties, fines, and the loss of tax concessions. These rules and regulations are also updated regularly, increasing the possibility of accidental non-compliance. You will need to stay up-to-date with all of these changes, in addition to managing your investments and complying with tax laws.
- Ineligible for compensation: SMSFs are not eligible for government-backed compensation in the event of fraud or theft. As a result, you may have to face the additional cost of taking out the insurance coverage for your investment.
With greater awareness of the risks and benefits involved, you can decide if an SMSF is the right investment choice for you.