Have you been thinking of setting up an SMSF for some time now? Perhaps you heard a colleague raving about his latest property investment, or maybe your broker mentioned it in passing. Either way, you can’t shake the feeling that it’s time to take control of your retirement pot. Before you set off like a horse through the gates, it’s important to make sure an SMSF right for you.

SMSFs give you the freedom to invest in what you want to grow your retirement savings. However, managing an SMSF and its investments is no easy task. While there is the possibility of your investments yielding impressive returns, an an SMSF member, you do expose yourself to greater risk than you would otherwise encounter with a standard superfund. That’s why it’s important to consider both the benefits and risks of setting up an SMSF.

At Squirrel, we can’t stress enough the importance of ensuring a self-manged super fund is right for you. So, in this blog, we’ve rounded up the top 8 questions to ask yourself before setting up an SMSF.

What to Ask Yourself Before Setting up an SMSF

1. Why Do You Want to Set Up an SMSF?

Where did you hear about SMSFs and what made you want to commence one? With the property market soaring in many parts of Australia, SMSFs have been gaining more attention than the latest Kardashian pregnancy – well, almost. It’s not uncommon to hear the basic facts about SMSFs, or someone else’s experience with an SMSF, and instantly start planning your future as an investment sensation.

However, it’s important to be wary of any advice offered to you. SMSFs are a licenced financial product, meaning only those with specific qualifications are legally allowed to recommend them to you. For an accurate and legally sound discussion on whether an SMSF is right for you, speak to a licenced financial advisor.

2. Will You Be Setting Up an SMSF Alone or With Others?

Unlike regular superfunds, with an SMSF, you can combine your superfund balance with up to three other people. While you each have your own allotted assets within the fund, the balance can also be invested as a whole, allowing you to invest in higher value assets. If you choose a Squirrel SMSF, you’ll also save on fees when you consolidate your super with other members as our SMSF setup and admin costs are per fund, not per person.

However, it’s important to note that sharing investments with others comes with its own batch of risks. You must all share the responsibility of carrying on the superfund and be prepared for all eventualities – including death, bankruptcy or if one member wants to close the fund.

3. Are You Prepared for the Responsibilities?

With a self-managed super fund, there are additional responsibilities that you need to consider. For example, you are responsible for conducting thorough research into your investment options and creating a suitable investment strategy for your super. Unlike a standard supfund, with an SMSF, you are responsible for the performance of your investments. Meaning the success or failure of your investments is up to you and your investment knowledge.

Additionally, there are other responsibilities to consider depending on your investment asset. For example, if you choose to invest in property with your SMSF, you will be responsible for buying the property, securing the tenants, maintaining the property and ensuring tenants pay their rent on time. Whereas if you decide to invest in cryptocurrency with your SMSF, you will be responsible for purchasing the cryptos from the proper exchange, securely storing your crypto, and regularly monitoring the investment so you don’t miss key trades.

It’s also important to note that with many self-managed super fund, you will be responsible for the auditing, compliance and tax obligations of your fund. However, with a Squirrel SMSF, that is not necessarily the case. As part of your monthly admin fee, our SMSF experts handle the annual compliance, administration and maintenance of your SMSF. We will also lodge your self-managed super fund’s annual tax return.

4. Is Your Super Balance High Enough to Make it Worthwhile?

At Squirrel Super, we want to empower all Australians to take control of their superfund - no matter their superfund balance.

That said, if you don’t have a sufficient amount in your superfund, setting up an SMSF may not be worthwhile for you. That’s not because you can’t take control of your investments on a smaller scale. Rather, the ongoing costs of running an SMSF may outweigh your capacity for returns.

Before setting up an SMSF, speak to a qualified financial advisor about the exact costs your investment strategy would incur, and weigh up whether your current fund would outperform an SMSF – and for how long. If an SMSF is not right for you at the moment, it may be right for you in the future.

5. What Do You Plan to Invest In?

…and why?! With a standard superfund, your fund is generally invested in shares and cash. An SMSF on the other hand, gives you the opportunity to diversify your investment portfolio into property, collectibles, cryptocurrencies, etc. So ask yourself, what do I want to invest in?

Many commence an SMSF with property in mind, as many Australian markets have outperformed other investment classes in recent years. While it’s important to know what you want to invest in, it’s also important to keep an open mind and speak to an SMSF specialist. Commencing an SMSF just to invest in property can result in a poorly diversified fund. Think of your SMSF as a long-term investment project, which may involve property to begin with, and incorporate other investments to balance and improve your portfolio over time.

Also ask yourself where you’re taking advice from. As we mentioned earlier, the only true SMSF advice you should take is from a qualified professional. Particularly when it comes to property, you’ll find everyone has an opinion to share over a sausage sizzle. SMSF investing is very different to personal investing, so take each tip with a grain of salt.

6. Do You Understand the Restrictions Around Assets Held Within the Fund?

This is an important question if you’ve decided to commence an SMSF based on a passion for a certain investment class. SMSF laws restrict trustees from engaging in any investment activities which breach the sole purpose test.

The sole purpose test assesses each investment on whether it is deemed to have the sole purpose of growing your retirement fund.

So, if you want to use your SMSF to invest in classic cars, properties or collectibles that you wish to use or maintain yourself, an SMSF might not be the right strategy for you. SMSF-owned assets cannot be improved, maintained, used or occupied by a member or anyone associated with the SMSF – sorry, your dream holiday home can’t be owned by your SMSF!

7. What is Your Investment Strategy?

In order to commence an SMSF, you must have a written investment strategy. While you may not have this set in stone in the very early stages of exploring whether an SMSF is right for you, you need to be prepared to do so in the future. An SMSF investment strategy involves members evidencing what they plan to invest in and why. This involves a sound understanding of investment practices and returns on those investments.

You may opt for a cash flow investment strategy, which involves making investment decisions based on the asset’s capacity to yield a positive cash flow. Other investors may prefer capital growth investing, which involves making investment decisions based on an asset’s potential for value growth for resale.

8. What Structure Will You Opt For?

SMSFs can adopt one of two structures – individual or corporate. Both structures can involve multiple members, but with an individual structure, there needs to be at least two members. As a result, if you’re looking to set up an SMSF by yourself, you must choose a corporate structure.

While an individual structure may be cheaper, it can often be more difficult to add or remove members from the trust. As a result, it can also be difficult to change ownership of your assets. On the other hand, with an individual structure, you may have less regulations to abide by. However, if your trust is fined by the ATO for not being compliant, the penalty fines will apply to each individual in the fund.

A corporate structure on the other hand involves setting up a company to act as a trustee for the fund. With a corporate structure, it is often easier and cost effective to add or remove members from the fund. Since a company is acting as a trustee for the fund, legal ownership of the assets won’t change when members are added or removed from the fund. With a corporate structure, your SMSF will be bound by corporate legislation. However, any penalty fees the SMSF faces by the ATO will only apply to the corporate trust, not to each individual members.

Here at Squirrel we always set up a corporate structure for our clients as part of our standard set up.

Are You Keen to Learn More?

If you’ve asked yourself all of these questions, and interested in learning more about self-managed super funds, book a free consultation with our team today!