3 things you need to know before setting up an SMSF

Those thinking of starting an SMSF in the new year need to ask themselves three questions before jumping in.

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This is the time of the year when many will be reviewing their financial arrangements and may be tempted to set up a self-managed super fund (SMSF).

The popularity of SMSFs is starting to wane but the overall number of these accounts is still trending up as many superannuants find the ability to limit fees and directly control where their retirement savings go to appealing.

The Hayne Royal Commission may prompt further interest in SMSFs given the conflicts of interests that were exposed at the big four banks, like Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB), and AMP Limited (ASX: AMP).

SMSF net establishments (the difference between accounts opening and closing) have been falling since the 2015 financial year when the total number of SMSFs increased 20,852 to 542,475.

This number has been steadily falling with net establishments halving to 9,867 in FY18 to 590,627, according to figures from the Australian Taxation Office (ATO).

This isn’t surprising as nothing grows at the same blistering pace for long and SMSFs are still incredibly popular as they account for around 30% of the circa $2.3 trillion in total superannuation assets.

But before you jump on the SMSF bandwagon, there should be three key questions on your checklist that you will need to ask yourself.

  • Do you enjoy investing?

This is perhaps the most important question because it can have a significant bearing on the performance of your SMSF portfolio. Those who have an interest and the time to commit to managing their own investments are likely to reap the benefits of owning an SMSF, while superannuants who prefer a fire-and-forget strategy might be better off having someone else manage their portfolio.

Having said that, managing an SMSF isn’t hard and you don’t need to be a brain surgeon to make it work. But you do need to be interested in what’s happening in the economy and investment markets for obvious reasons.

The time component isn’t as onerous as one might think either – that is provided you have the interest as you will always find time for things you care about. I estimate I would spend around 3-4 hours a month at most directly managing my portfolio (and not all at one time), which includes a quarterly rebalancing.

  • Do you have enough capital?

Most experts believe you should have between $150,000 to $200,000 before having an SMSF makes financial sense given the fees involved, such as the start-up cost and the annual accounting and auditing fees.

It could cost around $500 to $1000 in establishment expenses and the accountant and auditor could set you back another $3000-$4000 a year. This depends on the complexity of your investments and so you should check with your accountant.

However, some believe you need capital closer to $1 million in retirement savings to make it work.

From my experience, I think your skill as an investor will probably determine where in the range you sit.

Those who are reasonably confident in beating the market over a three-year period could start at the lower end of the range (although I think the low end should be lifted to between $250,000 to $300,000). Beating the market isn’t as hard as you might think, but that’s for another article.

  • Can you act as a trustee?

There are rules governing who can act as a trustee and you will want to be the trustee of your SMSF. But you can’t be a trustee if you are currently declared bankrupt, deemed to be mentally unfit, or have been convicted of certain crimes.

Again, you should check with a financial professional or your accountant for a full list of rules.

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Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia and National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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