With a $700 billion market and close to 600,000 funds in operation, more Australians than ever are choosing self-managed super funds (SMSFs).
If you are keen to join their ranks in the new financial year, here are a few tips to get you started.
1. Understand the super landscape
In 2017 a raft of changes to the superannuation system included new caps of $25,000 for before-tax contributions and $100,000 for after-tax contributions, along with tougher financial penalties for SMSF trustees who breach the super rules.
As we tick over into the 2018/19 financial year, new rules will apply for Australians seeking to downsize their home to boost their super.
With even more super changes proposed in the May 2018 Federal Budget, it is important to get to know the current super landscape before settling on an appropriate super strategy.
2. Assemble your team
Do you have the time and expertise to manage an SMSF – including administration, investment selection and tax management? If not, you are likely to need some assistance from a financial planner, broker or accountant.
SMSFs require specialist knowledge, so when selecting your team ask about their experience and accreditation in this area. The SMSF Association offers a useful “Find a Specialist” tool to help you search for SMSF professionals in your local area.
A good online administration solution is a seamless way to manage your SMSF, offering accurate benchmarks, real-time reporting and data-swapping between all involved – your bank, accountant, financial planner, online broker, and so on.
3. Put the foundations in place
Before setting up an SMSF, you need to decide how many trustees your fund will have. You can opt to be a sole trustee or may want to include your spouse or other family members. You can also opt to have a corporate trustee.
The next step is to sign a declaration and have a trust deed prepared. The deed establishes the rules of operation for the fund, such as the powers of trustees and conditions for payment of benefits to members.
It is important to ensure that your deed is tailored to meet the individual needs of your fund, so seeking legal advice is advisable.
Once your fund is established, you must register it with the ATO and obtain an Australian Business Number and Tax File Number. Your fund will then be required to lodge an annual tax return, have an annual audit prepared and pay an annual supervisory levy.
4. Map the way forward
SMSF trustees are required by law to prepare and implement an investment strategy for their fund and review it on an ongoing basis.
In setting an investment strategy, consider the following areas:
- What are the objectives of the fund? Examples include providing superannuation benefits to meet the retirement needs of members, ensuring that appropriate mixes of investments are held, maximising tax effectiveness and ensuring the fund can meet its expenses.
- What types of investment will the fund be permitted to hold and what is the target allocation for each?
- Will your fund hold insurance cover, such as life insurance, for each member?
- What is the risk tolerance of the fund? For example, when are the members planning to retire and what level of risk/volatility are they prepared to take on?
5. Put it in action
You’ve done the groundwork, so now it’s time to invest.
One of the best ways to manage risk and increase portfolio returns is to ensure your SMSF appropriately diversifies its assets. A common mistake many SMSF trustees make is investing in a narrow range of Australian companies, leaving the portfolio heavily reliant on the fortunes of one or two sectors.
An ideal investment portfolio will include some investments that have higher risk and rewards, such as global and Australian shares and property, and lower risk assets such as cash and fixed income.
Whatever path you decide to take, remember an SMSF is not a “set and forget” strategy and should be reviewed regularly to ensure it delivers the desired retirement outcomes for all members.