Setting Up Your Own SMSF? With Rewards Come Risks

Setting up your own SMSF (self-managed superannuation fund) is a bit like becoming a parent. Everyone thinks it is a great idea, many of us become one at some stage, but we don’t know how it feels until it happens. We look for advice so we can be good parents, but at the beginning, we can only imagine the joys and the challenges before us.

How is that like setting up an SMSF? Well, everyone thinks it is a great idea; many Australians have one but until it is up and running, the trustees can only guess at the responsibility and the time involved to get the best result for their retirement. Will the challenges outweigh the joys? Can investment decisions be made while keeping the administration up to date?

Initially, the idea of taking the reins yourself may seem exciting. You may be getting statements from your current superannuation fund and questioning its fees and performance. It is not such a great leap from wondering what is happening to thinking you could do better yourself, but what are the risks if you go your own way?

Lack of time and administration skills are the two obvious risks for trustees of an SMSF. However, there are other, lesser known risks to be aware of. For example, if the SMSF suffers a loss due to fraud or theft in the underlying assets, the members are not eligible for compensation under the superannuation laws. They also do not have access to the Superannuation Complaints Tribunal if there is a disagreement between fund members. There are other avenues open, such as legal action, but these are at the members’ expense.

Limited access to life insurance is another risk worth considering. In a large superannuation fund, life and disability insurance is easy to access, with default levels of cover often given without a medical assessment. With thousands of members, these funds negotiate reduced premiums but for an SMSF, insurance may be difficult to obtain and more expensive.

Also, most people are usually not considering an exit strategy at the beginning, but there are several trigger events that may need one. For example, a trustee may become a disqualified person through bankruptcy. Loss of capacity, losing residency status and the death of a member are other scenarios that could trigger the wind-up of the SMSF.

To ease the time constraints and administration tasks, most SMSF trustees work with experienced SMSF administrators similar to SMSF Assure who are up-to-date with the relevant legislation. They assist fund trustees with lodging returns, compliance issues and other administrative tasks, and generally lighten the load.

As any sole parent will tell you, the biggest challenge they have is being solely responsible for every aspect of their child’s wellbeing. This is not something they can hand to someone else. An SMSF trustee, however, can access the technical expertise of a dedicated and experienced superannuation team.

While the trustees are still solely responsible for the performance of their fund, just being able to talk things through with someone who knows the industry well makes running their own fund less of a burden. Trustees who know the risks as well as the rewards at the start are making a genuinely informed decision.