Tips and traps of DIY super

Recent market volatility and the aftermath of the royal commission has prompted many Australians to look a little closer at their superannuation fund and their options.

With more than 1.1 million Australians taking control of their superannuation by having their own self-managed super fund (SMSF), we explore the tips and traps to be aware of when considering this option.

A bid to save costs

Self-managed super funds are more cost-effective the more you have in them and while the Tax Office reports that the average size of an SMSF is about $600,000, many consider one when their balance is much less. Nearly half of all new DIY funds come from members aged between 25 and 44. Regardless of age, establishing an SMSF should be considered based on your stage of life and ability to contribute to the fund. For example, if you are a young couple with $300,000 in super and earning a good income where you are contributing $50,000 per year, you might consider an SMSF sooner, knowing that your balance is going to continually increase substantially each year. This is very different to someone who has reached retirement with the same amount of money and will draw down on their super over the next five to 10 years, reducing their balance substantially in a short period of time. When it comes to cost, ensure you have someone objective to look at your own personal situation and be wary of companies advertising to set up an SMSF for little or no fees.

Investment preference

Having your own super fund does give you a broad range of investments to consider but a common trap is to concentrate on only one major investment. While it might make financial sense for a business owner to consider their business premises as an option to hold in their super fund, having a sole investment, such as a residential property, can be dangerous, particularly when it comes to the liquidity of the fund. Diversification is key in any portfolio and your own super fund shouldn’t be treated any differently. Regardless of which super fund option you choose, it is prudent to ensure your investments are professionally managed and investment choices are run passed your adviser to ensure your fund stays compliant but is also diversified to mitigate risk.

Your responsibility

As a controller of your super fund, you are responsible for running it, so it is important you understand your responsibilities and obligations. Some of these responsibilities are to ensure your SMSF lodges a tax return, reports member contributions and other regulatory information along with ensuring the financial statements are audited each year. While there are more duties with an SMSF, many trustees will partner with an accountant and financial adviser to help ensure the fund meets its obligations. Keep in mind that not all professional advisers are licensed to advise on SMSFs, so find one who has the expertise to run you through all your options when deciding on the best superannuation solution for you.

SMSFs are not appropriate for everyone but in the right circumstances can offer the many benefits that one million Australians are enjoying today.

Written by Olivia Maragna. Please note that Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Source: Sydney Morning Herald.