There are a number of risks associated with self-managed super funds (SMSFs), which need to be considered carefully before setting one up. What are they?

What is a Self-Managed Super Fund?

A self-managed super fund (SMSF) is a superannuation fund where the trustees are also the members. This means that the members of the SMSF are in control of the fund and make all the decisions about how it is managed.

The main advantage of an SMSF is that it gives the members more control over their superannuation. However, there are also several risks associated with SMSFs that need to be considered carefully before setting one up.

The Risks of SMSFs

The main risks associated with SMSFs are:

1. Investment Risk

As the members of an SMSF are in control of the fund, they are also responsible for making all the investment decisions. This means that there is a greater risk that the fund will make poor investment decisions and lose money.


2. Compliance Risk

Many compliance risks are associated with SMSFs, including the risk of being penalised for breaching superannuation laws.

3. Liquidity Risk

An SMSF may have difficulty meeting its financial obligations if it does not have enough liquid assets. This could happen if the SMSF invests in illiquid assets such as property or shares.

4. Death and Disability Risk

If a member of an SMSF dies or becomes disabled, their superannuation benefits may be reduced. The SMSF may not have enough money to pay out the member's benefits.

5. Fraud Risk

There is a risk that the members of an SMSF may be defrauded by someone who is not a member of the fund. For example, a member may be persuaded to invest in a scheme that is not in their best interests.

6. Counterparty Risk

An SMSF may be at risk of losing money if one of its counterparties (such as a bank or broker) becomes insolvent.

7. Political Risk

The Australian government may make changes to the SMSF sector, which could negatively impact SMSF funds.

8. Inflation Risk

If inflation increases, the value of investments held by the SMSF may fall in real terms.

9. Interest Rate Risk

If interest rates increase, the value of investments held by the SMSF may fall.

10. Liquidity Risk

An SMSF may be unable to sell assets at their fair value due to a lack of buyers.

Penalties for SMSF non-compliance

Being a trustee of an SMSF means that you are responsible for running your superannuation fund according to the super rules. If you fail to comply with these rules, the Australian Tax Office (ATO) may impose penalties, including compulsory education and/or fines. These penalties can be quite severe for serious misconduct.

To Sum Up

In conclusion, a self-managed super fund can be a great way to take control of your financial future and have more control over how your money is invested. However, there are some risks associated with self-managing your own super fund. 

While some risks are associated with self-managing your super fund, these can be mitigated by researching, seeking professional advice where needed, and being diligent with your tax and compliance obligations.

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