A self-managed super fund (SMSF) is a private, superannuation or pension fund trust structure where the members are also its trustees. An SMSF can have one to four members, which brings a great degree of control that trustees have over personalizing the fund to their own requirements.
These days, as information about money management becomes more mainstream, we see more and more young people take control of their finances for future use. A growing number of younger Australians are setting up SMSFs in a desire to control their super themselves.
However, aside from the time, money, and responsibility needed in operating an SMSF, they are not cost-effective for lesser balance accounts. If you’re young and thinking about handling your super, let’s look closer into SMSFs and see if this is a worthy investment opportunity for you.
1. How Much Super Balance Should I Have for an SMSF?
Since an SMSF can have one to four trustees, younger investors who do not have a large super balance can pool their money together in a single SMSF. However, if the funds still come up short of $200,000, it may not be a great investment.
According to the Australian Taxation Office (ATO), SMSFs may not be the most cost-effective alternative when compared to costs in retail, industry, and corporate funds.
2. What is the Minimum Age Requirement to Set Up an SMSF?
By law, you must be 18 to be a trustee of an SMSF although people under 18 if a parent or legal guardian can act as their trustee. All SMSF trustees have legal obligations in managing the fund.
As younger people build up their super assets over time and gain acuity in handling investment funds along the way, you can choose to pay out or rollover all super, along with taxes and expenses needed, and set up your own SMSF. You can also keep your existing SMSF and just start a new one, which is perfectly legal.
3. What are the Risks of an SMSF?
Every investor entering an investment plan or trust fund will have legal responsibilities in keeping with the plan. However, these responsibilities rest on the shoulders of SMSF trustees themselves, as self-managers of the fund.
All SMSF trustees are accountable for the fund's activities and legal compliance, which can be risky. For example, all trustees are held liable and will be penalised even if the decision was made by one member or their representative.
If you are investment-savvy, you might like the idea of selecting and managing assets globally. However, you and your fellow trustees ultimately determine your fund's investment performance. This also comes with staying updated with changes to superannuation laws and taxes. You run the risk of an SMSF breach if you fail to manage your funds correctly.
Furthermore, even if your financial circumstances change, you are still accountable for keeping the fund. Another potential risk is a breakdown in member relationships, or if a member dies or becomes ill, which might have a negative impact on your SMSF.
4. What are the Benefits of an SMSF?
Despite the labour necessary in establishing an SMSF, many investors, young and old, choose to do so for its many advantages. Moreover, you can pool your super with up to four family members (including yourself). Not only can you save money, but you also get full transparency of all costs and returns for your super.
An SMSF can help you manage your taxes and provide investing freedom to grow your super balance. In addition, SMSFs provide for flexible retirement planning and asset management in the event of incapacity or death.
Every investment strategy involves some risk, but when done correctly, the financial gains compounded over time outweigh the risks. There is always a way to invest with minimal risk and maximised profits. If you want to set up an effective SMSF, you can get a qualified financial adviser who can explain your duties and how to invest wisely for your balance to rise.
Learn more about our unique SMSF prospects and put your money to work for you. If you need to set up an SMSF, Wealthy You has a team of the best mortgage brokers in Sydney to help you build the best financial future. Contact us and gain access to various mortgage solutions to meet your specific financial needs!