I was talking to someone the other day about why we set up a self-managed super fund (SMSF) over 15 years ago and got me thinking what are the pros and cons of a setting up a SMSF these days. So I created the below list. Anyone else want to agree. disagree or comment on my list?

1. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
The biggest reason why people start a SMSF is
because of the control. You as trustee make the
decisions as to where you want your SMSF to
invest. Now there are some things you can’t
invest in, like the house you live in, but apart
from that you can invest the SMSF money
anywhere you like.
With this ability to control your investments, you
as trustee are responsible for the making
decisions about where you want to invest. Not
everyone is comfortable making these decisions.
Now you can alleviate the stress around this by
choosing index based investing which removes
the need to pick individual stocks

2. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
Another reason for a lot of people is cost. Most
costs for SMSF’s are typically flat. An audit costs
pretty much the same if you have $100,000 0r
$1,000,000 in your SMSF. A typical SMSF would
cost between $2,000 and $5,000 for audit, tax
returns, financial statements, supervisory fees
and ASIC fees. For our last SMSF year, our costs
were $3,750.
As the annual costs are fixed, costs as a % of your
super balance will be high if you don’t have
enough super. So a low balance SMSF will have
high costs relative to industry or retail funds.
Also, SMSF’s can have a high set up cost,
depending on how you do this. This will
probably include a statement of advice from a
financial planner, which ASIC has focused on to
ensure people are being properly advised about
the pros and cons or SMSF particular to their
own circumstances.

3. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
Some people think they will get better returns. Most experts struggle to outperform the market
over the long term. So if they can’t, what makes
you think you can?

4. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
SMSF’s are able to gear via what is known as a
limited recourse borrowing arrangement (LRBA).
There are rules (and extra costs) associated with
this but can leverage your gains (and your
losses). For example we have these in our SMSF.
In one case we purchased a property for
$550,000, with about $350,000 of borrowings.
So our net investment was $200,000 and the
return so far is over $300,000. A 150% return
over 5 years, hence why you can make better
returns.
LRBA’s come with extra cost and extra risk. As
was mentioned if you buy the wrong asset, it can
leverage your losses. And today the banks are
tightening their rules around this, so it is
currently harder to access LRBA lending.

5. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
You as trustee are responsible for managing your
SMSF and the associated paperwork. This will
take up your time. And there may be fines and
penalties for non-compliance. So you have to be
prepared for this. There are new platforms being
released all the time that can handle the
administration of your fund to save you time, but
these will be at a cost.

6. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
Ability to apply specialist knowledge if you have
it. We for example understand property and
have leveraged this knowledge inside our SMSF.
Some people argue that SMSF’s are less
diversified than retail or industry funds. Our
SMSF for example is heavily into property. But
we are diversified by having property in 3
different cities in 2 different countries. And the
truth be told about a lot of growth funds, they
are heavily invested in share markets, which
minimises risks if one company underperforms.
But does nothing to reduce the risk of the whole
share market crashing, which has happened
many times.

7. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
Whilst there are limits to what a SMSF can invest
in, it still can invest your money directly into
some asset classes that retail and industry funds
don’t offer. For example direct residential or
commercial real estate. Indeed for business
owners, it often makes sense for them to have a
SMSF that owns the premises they operate out
of. The rent the business pays effectively
becomes the business owner’s superannuation.
Industry and retail funds will argue that they
offer investments in areas that individuals can’t.
For example large infrastructure projects. A
SMSF can generally find a wholesale provider of
these classes and can invest in them, albeit
having to pay the wholesaler a fee for this.

8. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
SMSF’s have a far better ability to manage
taxation impacts on the fund. For example they
can use franking credits, or other deductions to
reduce the tax paid on contributions below 15%.
In a retail or industry fund, you will pay 15% tax
on your contributions.
Another example is when moving from
accumulation to pension mode. You can do this
often in a SMSF without triggering any capital
gains tax. Whilst in retail and industry funds, you
often end up paying this.
.

9. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
As a SMSF you can decide your own insurance
levels and only take out appropriate cover, which
you can shop around and get the best deal for
you.
In a retail or industry fund, you have to take their
insurance provider. This may not always be the
best deal for you. Last time I looked my life
insurance cover per $ of coverage was only
beaten by 10 other superfunds. So my insurance
was cheaper than over 200 other funds.

10. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
In my view SMSF’s really come into their own when
dealing with pensions. There are rules around
pensions, such as the maximum you can have in a tax
free pension mode, and minimum annual amounts you
need to take out. But as long as you comply with these
rules in your SMSF you have the flexibility to vary your
pension payments to suit your needs. For example if
you want an overseas holiday every two years, you can
increase your pension in these years to cover your
holiday without having to deal with the rules and
admin of a retail or industry fund. You could take that
part of the pension as a once off amount at the time
you book your holiday.
Or, if you decide to go back to work, you can convert
your pension back to accumulation. Or you can
withdraw all of your balance.

11. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
SMSF’s are accumulation fund. If your super is in
a defined benefit fund, you may not want to
swap over as the pension payments you get may
end up being lower.

12. The Pros and Cons of a Self- Managed Super Fund (SMSF)
Positives Negatives
SMSF’s can help save your kids super when they
first start work. For instance my children joined
our SMSF when they first started working. Very
little extra fees for the SMSF for them to join, but
saved them the regressive administration fees
that hurt low super balances.
If you are in pension mode, this becomes more
hassle to have separate accumulation and
pension modes. So at this stage, I suggest your
kids either set up their own SMSF (if they have
enough money), or put them into a retail /
industry fund till they build it up. I would then
keep the SMSF till they are ready and they can
simply transfer their money back to it. And
funnily enough, people need advice to set up a
SMSF, but don’t need advice to transfer into one.
Saves them thousands in set up costs and you
thousands in wind up costs!