5 ways to smarten up your SMSF

There are over 560,000[1] Self Managed Super Funds in Australia, many of which could benefit by following a few simple steps.

The stunning growth of SMSFs in Australia means that over 1 million Australians are now members of an SMSF, with combined assets greater than both retail and industry super funds.

While many of these SMSFs are running smoothly, many others could benefit from some fine-tuning to ensure the best interests of members are being looked after.

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5 tips for a smarter SMSF

1. Diversify widely

SMSFs give you greater freedom around how and where you invest your retirement savings. But with that freedom comes the responsibility to ensure there’s an appropriate balance of investments to meet the objectives of the fund.

For most people, a smart way to manage the risks of investing is to include a mix of growth assets (e.g. shares and property) and defensive assets (e.g. cash and fixed income) in your portfolio – ensuring you’re not too exposed to any one asset class in particular.

The need to diversify also applies within asset classes. For example, while SMSFs are heavily invested in Australian shares (31.7% of total assets at June 2015[1]), few are invested in international shares (0.3% of total assets). This bias not only increases risk, it can also hinder growth. In the year to 30 June 2015, international shares (+25.2%) significantly outperformed Australian shares (+5.7%)[2].

Exchange Traded Funds (ETFs) can be a cost-effective way to add diversification to an SMSF, with some ETFs able to give you exposure to an entire asset class in a single investment.

2. Avoid a liquidity trap

The ability to buy real property in super is one of the popular attractions of SMSFs. The downside of owning large assets like property inside your super is the problem it presents if your fund needs to pay out one of its members  – e.g. due to death or permanent disablement.

In this situation, an SMSF trustee may be forced to sell the asset quickly to pay a member’s benefit. This could result in an unfavourable outcome for all concerned.

One way to potentially avoid this is to ensure the SMSF holds a significant amount of cash and other liquid assets (e.g. shares and ETFs). Life insurance may also have a key role to play (see # 3).

3. Consider life and TPD insurance for members

Unlike some employer super funds, life and total and permanent (TPD) insurance isn’t compulsory in SMSFs. However, trustees must consider the need for insurance as part of their investment strategy, and this needs to be documented.

Taking out life and TPD insurance can be a smart way to protect the members of your SMSF as it allows you to use before-tax super contributions (e.g. salary sacrifice) to pay insurance premiums. While there are pros and cons of holding life insurance within super, it may make your cover more cost-effective than if you held it outside super.

4. Keep track of your costs

While SMSFs can more cost-effective than retail or industry funds for people with substantial super balances, the additional costs of running SMSFs (e.g. accountant and administration fees) can outweigh the savings for people with lower balances.

As a rule of thumb, only people with more than $250,000 should consider starting an SMSF. But even people with larger balances need to keep a close eye on your costs to make sure you’re not diluting your savings with excessive transaction costs and capital gains tax.

5. Follow the rules (and rule changes)

There are many rules and regulations SMSF trustees need to comply with. For trustees that don’t comply, the ATO has a wide range of penalties ranging from 5 units ($900) for not complying with an education direction, to 60 units ($10,800) for lending from the SMSF to members or relatives[3]. And you can’t pay these fines with superannuation assets.

It’s also essential to keep track of changes to rules and regulations – such as the new obligation for trustees to value SMSF assets at market value, and review the fund’s investment strategy, on a regular basis.

A good way to ensure you’re always compliant is to use an SMSF administration service that alerts you when you need to act, and seek regular advice from your accountant and financial adviser.

What are SMSF Trustees REsponsible For

If you have an SMSF, you may also value working with a financial adviser who can help you determine the best way to structure your finances.

We can help! Call us on 1300 858 492 to find out more.


[1] http://www.superguide.com.au/smsfs/smsf-investment-diy-super-asset-types

[2] https://static.vgcontent.info/crp/intl/auw/docs/resources/index_chart.pdf

[3] https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/How-we-deal-with-non-compliance/

[1] http://www.apra.gov.au/Super/Publications/Documents/1511-QSP-1509.pdf

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