A self-managed superannuation fund (SMSF) might only be worth your time and money… if you have lots of time and/or money.
What is an SMSF?
An SMSF is a super fund that you — or often, a financial adviser — manage.
They have their perks, like the ability to manage the investments and tax planning. Like all super funds if the SMSF remains within the law it'll pay tax at 15%, which is better than buying shares in your own name if you pay tax at 30%.
Because of the reduced tax rate, SMSF administers love dividend shares.
For example, if an SMSF buys Commonwealth Bank of Australia (ASX: CBA) shares that pay dividends with 30% franking credits, the 15% SMSF tax can be minimised.
You can also add up to four members to an SMSF, so it could be suitable for a husband and wife duo.
What are some of the risks
As a rough rule of thumb, some experts say you need at least $500,000 to make the SMSF's costs competitive with industry funds. ASIC believes any SMSF with less than $200,000 would likely be inappropriate.
For example, if you could navigate the maze of legal rules to keep your $500,000 SMSF complying, a bill of $3,000 in accounting, auditor or other fees might be good. But if you chuck in an adviser's fees, you could be slugged $5,000 to $10,000. That's based on the ATO's average cost of 1.1%.
SMSFs can require lots of time and — as you can see from above — money. If you don't have more than $500,000 and/or the financial know-how, it may not be worth the cost. Of course, having an adviser might help…if they truly are working for you.
If you tried to do it on a low-cost budget, it's important to note that SMSFs can also become 'non-complying' if they are not managed properly. That could be a big headache because the ATO would issue a harsh penalty. While an industry fund, that may charge even less than 0.7% per year and does everything for you, might also become non-complying it's not as likely.
According to the ATO, around 2% of SMSFs have a compliance issue each year.
Another thing is, how and when do you get out of the SMSF? And who will manage the investment strategy which must be designed and implemented?
Foolish Takeaway
SMSFs are a booming industry. Just ask Class Ltd (ASX: CL1), a provider of software for SMSF administrators. No doubt many people would swear by them. And at this time of year, many people would be weighing up the pros and cons.
Alternatively, you can just shop around for a low-cost industry fund and sleep easy at night.
