Is an SMSF worth it?

There are a growing number of people looking to invest in property through a self-managed super fund (SMSF). As someone involved in the careful management of more than 100,000 Australians’ retirement savings, I’ve seen this first hand.

While an SMSF may be appropriate for some, it’s not the best choice for everyone.

With this being the case, I have outlined three key considerations that all investors should take into account before setting up an SMSF to purchase property.

DIVERSIFICATION
First and foremost, investors should be aware that establishing an SMSF to buy property could result in their superannuation not having an adequate level of diversification. In many cases, property acquisitions will make up all, or most, of an SMSF.

Given that the two biggest investments most people will make in their lives are a property purchase and superannuation, this approach can leave investors exposed to the market fluctuations of a single asset class.

Maintaining a diversified superannuation portfolio can limit or mitigate the impacts of these fluctuations on an investor’s retirement savings.

ADMINISTRATION COSTS
It is important for investors to recognise that managing an SMSF can require significant time and expense to ensure all legal, taxation and administrative requirements are met.

While most SMSFs are established to capitalise on perceived cost savings, many SMSF trustees soon discover that managing their own super is both costly and time consuming. Failure to meet the regulatory requirements around SMSFs can also result in significant penalties from the Australian Taxation Office.

INSURANCE AND COMPENSATION
I’ve seen countless examples of the importance of income protection and life insurance, not to mention the relief that automatic cover brings to so many Australian families.

Investors often don’t realise they forgo automatic insurance cover upon moving to an SMSF. Why? Because they don’t even know they have it in the first place.

This means SMSF investors can end up with less cover, no cover at all or pay significantly more to achieve the level of cover they had through their industry or retail fund. Without automatic acceptance they may also need to get underwritten, which can involve blood and bio tests.

Additionally, while Australian Prudential Regulation Authority-regulated funds are eligible for compensation if they suffer loss due to fraud or theft, SMSFs are not.

THE RIGHT STRATEGY
Investors looking to invest in property without giving up the protection and security provided by a fund structure would be wise to check whether their super fund offers a direct investment option (DIO), rather than jumping on the SMSF bandwagon without being adequately prepared.

While SMSFs may be appropriate for some Australians looking to purchase property, I strongly encourage all investors to carefully weigh up the pros and cons before committing.

Remember, this is your retirement savings. Make time to get professional financial advice to ensure you arrive at a decision.