Self Managed Super
All Australians have the option to manage their own superannuation. These “do-it-yourself” supers or self managed super, otherwise known as a DIY, SMSF or SMS, give you greater control over your retirement savings and equally as much responsibility over your own financial future. DIY super management requires a vast amount of preparation, resources, expertise and discipline in order to ensure that you can afford your desired standard of living in retirement. In order to determine whether a self-managed super is right for you, follow these six important steps.
1. Seek Professional Advice
Even if you have a strong grasp on the fundamentals of independent asset management and investing, consulting a professional can help you ensure that your investment strategy is sound and that you comply with all applicable laws.
A licensed financial adviser can evaluate your situation and recommend a product that will best help you reach your goals. Furthermore, working with a financial advisor offers you a certain amount of recourse if your expectations are not met. If your financial advisor leads you astray through negligence or fraud, you can bring your complaint to the Financial Ombudsman Service, a free and independent complaints scheme,
Accountants and tax agents can help you establish your self-managed super in a manner that is compliant with Australian law and advantageous for tax purposes. They can offer valuable advice on how to structure and value your SMS and help you avoid common pitfalls.
Read up on how to select a good financial advisor before attempting to run a DIY super.
2. Evaluate Your Own Resources
Being the trustee of a self-managed super requires a considerable amount of time, money and skill. Super professionals make it their full time job to stay current on investment laws and track the performance of your superannuation fund. You, on the other hand, will likely have to split your time between your job, family and hobbies and the management of your fund.
Considering expenses, the cost of establishing a SMS is about $200,000, plus about $2,000 in yearly costs. Furthermore, you will also need to pay for insurance and death and disability protection. Taken in sum, these costs can quickly exceed the fee you would pay a professional, so it is important to be confident in your own ability to outperform.
To help you weigh out whether running a DIY super is right for you, review the “warning lights” for self-managed super.
3. Understand the Laws and Risks
When managing a DIY super, your retirement savings are on the line, so it is imperative that you properly diversify your investments and hedge your bets. By spreading your investment over several strategies, companies and sectors, you prevent being completely wiped out if one of your investments performs poorly. Be sure you have several well-developed strategies in order to lessen your overall risk.
You will also want to study the exact letter of the law. All super funds, including self-managed super funds, are heavily regulated by the Australian Taxation Office (ATO) and failing to adhere to the law can result in hefty penalties and legal recourse.
Be sure you read the guide on how self-managed supers are regulated.
4. Develop a Trust Deed and Investment Strategy
Each SMS requires a trust deed, which delineates the fund’s governing rules. This deed should be carefully tailored to your fund and spell out the fund’s objectives and the needs of each member.
Self-managed funds can have up to five trustees. In order to ensure that investment decisions comport with each member’s best interests, it’s important to clearly define the investment strategy. Violating the terms of the strategy may constitute breach of fiduciary duty and can result in litigation or other strife between trustees. This can be difficult to achieve, as each trustee may have differing risk tolerance and ages.
Be sure you have a well-defined understanding of how you will make asset allocation decisions among, cash and bonds (defensive instruments) and property and shares (capital growth investments). It is important to balance your asset allocations so that your investment grows faster than inflation and is protected from market volatility.
Before you switch to a do it yourself super, read up on how to determine if you have a sound investment strategy.
5. Implement a Solid System of Record Keeping and Reporting Obligations
As a trustee of a SMSF, you will be required to keep accurate records in order to track your fund’s performance, document your decision-making process and remain compliant with ATO and federal law.
As mentioned above, if you make a poor investment decision, you may be liable to dissenting trustees. By showing your rationale and demonstrating that you conducted sufficient due diligence, you can protect yourself from disputes and litigation.
You also have numerous annual reporting obligations to regulating bodies. Failure to submit timely, accurate reports can result in fees and penalties.
Read the record keeping requirements for self-managed super funds before you begin.
6. Retain an Approved Auditor
All supers are required to have an annual auditor. This includes self-managed supers and DIY superannuation funds. Your auditor must be independent and approved by Australian regulatory authorities. This auditor will report both to you and to the ATO, in the case that you have breached any rules associated with managing a super.
Refer to this resource when choosing an approved auditor for your self-managed super fund.
A decision to manage your own self-managed super should not be done lightly. Just as a starting a business requires a vast amount of research, planning and discipline, so too does establishing a SMS – except far more is potentially at stake when running a DIY super. Follow each of these steps carefully to avoid bankrupting yourself in retirement.