Your retirement savings play a significant role in your journey towards Financial Independence . You might be familiar with superannuation funds, but how much do you know about self-managed super funds (SMSFs)? These DIY super accounts are gaining traction among Aussies who want more control over their financial future.

SMSFs seek to offer flexibility and control, but they also come with responsibilities. They also aren’t for everyone. In this article, we'll unpack the ins and outs of SMSFs. We'll explore what they are, how they work, their benefits and risks, and how you can invest through an SMSF.

Here you’ll find the key information, whether you're curious about SMSFs or seriously considering starting one. Let's dive in and demystify self-managed superannuation funds!

What is a self-managed superannuation fund?

An SMSF is a private superannuation fund that you manage yourself. It's designed for people who want direct control over their retirement savings. Unlike traditional superannuation funds, also known as APRA regulated funds , you run the fund and make all the decisions.

The key difference from regular super funds is control. With an SMSF, you choose where to invest your money. You can invest in a wide range of assets, including shares, property, and term deposits.

SMSFs have some unique features:

• Members: SMSFs can have up to six members. These members are usually family or business partners. Each member is also a trustee of the fund.
• Control: As a trustee, you make all the investment decisions for the fund. Or, you can choose to hire a corporate trustee.
• Personalised investment: You can tailor the fund's investment strategy to suit your needs and goals.
• Responsibility: You’re responsible for complying with superannuation laws and ensuring the fund meets its obligations.

The Australian Taxation Office (ATO) regulates SMSFs. Trustees must follow strict rules to ensure the fund is managed correctly. This includes keeping accurate records, preparing financial statements, and having the fund audited annually by SMSF auditors.

Anyone can set up an SMSF, but it's not suitable for everyone. You need time, financial and legal knowledge, and often a significant amount of money to make it worthwhile.

How do SMSFs work?

SMSFs must be set up solely to provide retirement benefits and can't be used for personal gain before retirement.

Setting up an SMSF involves several steps:

1. Create a trust: You need to establish a trust with a trust deed that outlines the fund's rules.
2. Appoint trustees: Choose individual trustees or set up a corporate trustee.
3. Register the fund: Apply for an Australian Business Number (ABN) and Tax File Number (TFN) for your SMSF.
4. Open a bank account: Set up a bank account for your SMSF to manage cash flow and investments.
5. Develop an investment strategy: Plan how the fund will invest its assets to meet members' retirement goals.

There are initial and ongoing costs involved in running an SMSF. These include setup fees, annual audits, accounting, and legal advice. Managing an SMSF also requires a significant time commitment. Trustees must stay updated on superannuation laws and ensure the fund complies with all regulations.

Understanding these basics is key before deciding if an SMSF is right for you. It's a big responsibility and comes with risks, but for some, the control is worth it.

How are SMSFs different to regular super funds?

SMSFs and APRA regulated super funds serve the same purpose: to save for retirement. However, they differ in several ways:

• Control: With an SMSF, you have full control over the investment decisions. Regular super funds have professional managers who make investment decisions on your behalf.
• Responsibility: As an SMSF trustee, you’re responsible for ensuring the fund complies with all superannuation laws. This includes record-keeping, reporting, and annual audits. Regular super funds handle compliance and administration for you.
• Personalised investment strategy: SMSFs allow you to tailor your investment strategy to your specific goals and preferences. Regular super funds offer a range of investment options, but you have less flexibility to customise your portfolio.
• More investment options: With SMSFs, you can invest in a wider range of assets, including direct property . Regular funds typically offer pre-set investment options and usually invest in more traditional assets like shares, bonds, and managed funds.
• Costs: SMSFs can have higher setup and ongoing costs, such as accounting and audit fees. These costs can have a lower impact on larger balances than on smaller balances. Regular super funds typically charge a percentage of your balance as administration fees, which can be lower for smaller balances. Investment management fees also depend on your chosen investment options.
• Time commitment: SMSFs require significant time and effort to manage. Regular funds usually need minimal involvement from members.
• Insurance: Regular funds usually offer default insurance. With an SMSF, you need to arrange your cover if desired.
• Dispute resolution: Regular funds have internal processes for complaints whereas SMSF disputes may require legal action.
• Government protection: Regular funds are covered by government safeguards against fraud or theft. SMSFs don't have this protection. So if you lose money because of fraudulent activity, you won’t have access to external authorities like the Australian Financial Complaints Authority (AFCA) .

Prefer the cliff notes version? Here’s a snapshot of the differences between SMSFs and regular super funds:

Factor	SMSFs	APRA regulated super funds
Control	High	Limited
Investment options	Wide range	Pre-set options
Costs	Higher setup and ongoing costs, can be lower for larger balances	Admin fees are a percentage of the balance
Time commitment	High	Low
Compliance responsibility	On members as the trustees	Handled by the fund trustee
Insurance	Must be arranged separately	Usually included
Dispute resolution	May require legal action	Internal processes
Government protection	Not covered	Covered

These differences highlight why SMSFs suit some people but not others. Your personal circumstances, financial goals, and willingness to take on responsibility all play a part in deciding which type of fund is right for you.

What are the potential pros and cons of SMSFs?

For long-term investors, SMSFs can be an attractive option. However, like any financial decision, they come with advantages and drawbacks. Let's explore these to help you make an informed choice.

Potential pros:

• Greater control over investments
• Potential for lower fees with larger balances
• Flexibility in investment choices
• Possible tax advantages
• Estate planning benefits

Potential cons:

• Time-consuming to manage
• High responsibility for compliance
• Potential for higher costs with smaller balances
• Risk of poor investment decisions
• Loss of some protections offered by regular funds

Weighing the pros and cons of SMSFs can help you understand if managing your own fund suits your needs. While SMSFs offer more control, they also demand more time and expertise. For some long-term investors, the benefits outweigh the challenges, but it's not a one-size-fits-all solution.

How can I invest through an SMSF?

Start by creating a clear investment strategy. This plan should outline your investment goals, risk tolerance, and how you plan to achieve these goals. Review and adjust your strategy regularly to stay on track. Here are some investment types you can include in your strategy:

• Property: You can invest in residential or commercial properties.
• Shares : Direct investments in Australian and international shares.
• Fixed income: Options like bonds and term deposits.
• Managed funds: These pool your money with other investors, which is then managed by a fund manager.
• Exchange-traded funds (ETFs) : These track market indices or sectors.
• Cash and term deposits: These provide a steady, relatively low-risk income.
• Collectibles: Investments in art, antiques, and other approved items.

Investing in an SMSF requires following your fund's investment strategy. This strategy should typically consider factors like diversification, risk and return, liquidity and members’ needs.

Strategy factor	What it means
Diversification	Spreading investments across different asset types.
Risk and return	Balancing potential gains with acceptable risk levels.
Liquidity	Ensuring some investments can be easily converted to cash.
Members’ needs	Considering the age and retirement goals of all members.

It's important to note that some investments are restricted or prohibited. For example, you can't:

• Buy assets from fund members or their relatives
• Lend money to fund members or relatives
• Use SMSF assets for personal benefit before retirement

Investing in an SMSF involves careful planning and decision-making to align with your objectives while following the rules. The ATO closely monitors SMSF investments and breaching the rules can lead to penalties.

Before investing, consider seeking advice from financial professionals, like an SMSF specialist. They can help you develop and maintain a solid investment strategy and ensure you comply with regulations.

Should I invest in an SMSF?

Deciding to start an SMSF is a big step. It's not suitable for everyone. Here are some key factors to consider:

• Fund size: SMSFs often work best with larger balances. This helps spread out the costs. Do you have enough super savings to make an SMSF cost-effective?
• Time: Managing an SMSF can be time-consuming. Can you commit several hours each week to manage your fund?
• Expertise: There are legal responsibilities involved in running an SMSF. Do you understand investment markets and super laws?
• Interest: Are you keen to learn about investments and stay updated on regulations?
• Costs: Have you compared the potential costs of an SMSF to your current super fund?
• Goals: Does an SMSF align with your long-term financial objectives?
• Risk tolerance: Are you comfortable making investment decisions and bearing the responsibility?

In the end, it's about deciding what’s right for you. The goal is to choose the best option for your retirement savings. Consider seeking professional advice before making a decision. A financial adviser can also help you weigh the pros and cons based on your specific situation.

The wrap-up on SMSFs

SMSFs offer a unique way to manage your retirement savings. They provide greater control and flexibility but also come with added responsibilities.

Your choice depends on your financial situation, goals, and willingness to take on the role of trustee. Ultimately, the best super strategy is one that aligns with your needs and comfort level. Whether you choose an SMSF or stick with a regular fund, the goal remains the same: to retire comfortably .

Stay informed and ask questions to make the decision that’s right for you. Your future self will thank you for taking the time to make an informed decision about your super.