Are you ready for a SMSF? Experts urge for caution and understanding

Australian self-managed superannuation fund professionals are urging people to seek advice before establishing an SMSF, or risk inadequately preparing for their retirement.

The SMSF industry has boomed in recent years with it now equating to a third of the superannuation market. Over the last decade, SMSFs have increased in value from $83 billion to $474 billion and the sector is tipped to reach $3 trillion in the next 10 years.

But despite the blossoming sector, there have been recent concerns over too many people entering into a SMSF without the adequate knowledge or ability to manage their fund.

ASIC raised the alarm last year when it began investigating high-risk SMSF issues, examining the quality of advice given to investors.

SMSF Professionals’ Association of Australia chief executive Andrea Slattery told SmartCompany before establishing a SMSF, you need to consider where you are in life.

“Look at your personal circumstances and consider the state of your employment, family and finances. Look at where you are and what kind of advice you might need and how you can get the information which will allow you to make informed decisions and evaluate whether or not there are issues you needs to address before starting a SMSF.

“You also need to look at issues around if you want control and flexibility and if there is an opportunity to grow your account balance. Consider the access you have to dollars and future dollars and make sure you seek some good advice,” she says.

Slattery says people with a “low earning capacity and low capital” should not have a SMSF.

“SMSFs are for a certain sector of the community who are willing and able to take on the responsibility. If you don’t want responsibility for it, you shouldn’t be considering it,” she says.

Slattery says to be a good candidate for a SMSF you should have between $200,000 and $250,000 in your superannuation savings.

“You need to think about if an SMSF is an efficient method to build up your fund quickly. You need to be able to review the costs of setting it up and evaluate whether or not it’s right for you now, in the future or not right for you at all,” she says.

CPA Australia head of business and investment policy Paul Drum told SmartCompany there is no magic number which makes a SMSF a worthwhile choice, it comes down a person’s willingness to take on the “duties and obligations”.

“You need to understand what you’re actually getting into. You have to have an annual audit, lodge returns annually and have an investment strategy, so you need to be able to handle the compliance and investment obligations.

“The other thing to consider is do you have enough money to actually commence one? The annual compliance fees can be quite high,” he says.

Drum says there are many mistakes SMSF holders can make, including trying to access the money in their account too early, breaching the Superannuation Industry Supervision Act and not actively monitoring their investments.

“If you don’t actively regularly monitor your investment strategy, then it just becomes a holding pen.

“If you’re going to start an SMSF it should be part of a whole financial plan and a part of a holistic investment strategy. Just because you’re local property person says you can buy this property and put it in the fund, that’s not a reason to start a SMSF, you need to seek advice,” he says.