Managing a self-managed super fund (SMSF) is no ordinary task — as the famous adage goes, "with great power comes great responsibility," and this could not be more accurate for fund owners as they navigate the risks and challenges that come with SMSFs.
If you're considering establishing an SMSF, it is important to realize that the do-it-yourself nature of the fund places a significant responsibility on your shoulders, especially when it comes to managing potential risks.
But what are these risks and how can you deal with or avoid them? Below are the most significant risks and challenges you will likely face when you set up and run your SMSF.
Compliance risks
One of the biggest challenges you will have to deal with is compliance risk. SMSFs are subject to a range of complex rules and regulations that must be adhered to, including the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).
You must keep in mind that failure to comply with these rules can result in significant penalties, including fines, loss of tax concessions, or even the disqualification of the SMSF.
SMSFs deal with two important government agencies: the Australian Tax Office (ATO) and the Australian Securities and Investments Commission (ASIC). The former acts as the key regulator for SMSFs while the latter oversees the investments and insurance portion of the fund. Know more about the rules governing SMSF in this guide.
How to avoid compliance risks
To steer clear of compliance risks, it's crucial for SMSF owners to have a comprehensive understanding of the rules and regulations that govern their funds.
Furthermore, seeking expert guidance from a qualified SMSF professional is highly recommended to ensure that the fund adheres to regulatory requirements.
Investment risks
SMSF owners have the freedom to invest in a wide range of assets, including shares, property, and managed funds. However, with this freedom comes the risk of poor investment decisions, which can result in significant losses.
For instance, concentration risk can be a particular concern for SMSFs that invest heavily in a single asset, such as property or shares in a single company.
How to avoid investment risks
A rule of thumb: Do not put all your eggs in the same basket — to avoid investment risks, you should have a well-diversified investment portfolio that is tailored to your individual circumstances and risk appetites. You should also regularly review your investment portfolio and consider rebalancing it if the allocation to a single asset or asset class becomes too large.
As with other risks, you can seek professional advice from a qualified financial advisor or investment specialist before making any investment decisions.
Administration risks
SMSFs require a significant amount of administration, including record-keeping, reporting obligations, compliance requirements, investment documentation, and insurance.
As a trustee, you are responsible for maintaining accurate and up-to-date records for the fund, including financial statements, tax returns, and transaction records. You will also have the responsibility of preparing and lodging the fund’s annual tax return and financial statements.
Any failure in administering your SMSF could result in penalties.
How to avoid administration risks
To avoid administration risks, SMSF owners should ensure they have a robust administration process in place, which includes keeping accurate records, regularly reviewing investment performance, and preparing annual financial statements and tax returns.
A suggestion would be to engage the services of a professional SMSF administrator to manage the day-to-day administration of their fund.
When choosing an SMSF administration service provider, you must consider several factors, including if the have a license from ASIC and professional indemnity insurance.
Fraud and scams
Given that you have the flexibility to choose where to invest, SMSFs are increasingly being targeted by fraudsters and scammers who use a range of tactics to convince owners to invest in sham schemes or transfer funds to illegal accounts. These can result in significant financial losses for SMSF owners.
How to avoid frauds and scams
To avoid fraud and scams, you should be vigilant when receiving unsolicited investment offers or requests for information about your fund. you should also verify the identity of anyone requesting information or access to the fund and seek professional advice before making any investment decisions.
Learn more about SMSF investing and how to build an investment strategy in this guide.
Estate Planning Risk
Estate planning is a crucial aspect of managing an SMSF, and you and your trustees should ensure that the fund's assets are distributed according to your wishes when anyone passes away. Trustees should have a valid and up-to-date will and consider establishing a binding death benefit nomination to direct how the fund's assets will be distributed.
How to solve estate planning risk
To avoid estate planning risks, it is vital to plan early. Start by making a list of all your assets and liabilities and deciding who you want to inherit your assets. You should also consider appointing a guardian for your children and an executor to manage your estate. It is a must to be clear and concise in your estate plan, so there is no room for misinterpretation or disputes.
Make sure that you review your estate plan regularly.
You can also consult with an estate planning lawyer or financial advisor who can help you understand the legal and financial implications of your estate plan. They can also help you avoid common mistakes and ensure that your estate plan complies with the relevant laws and regulations. They can also help you to minimize taxes and other costs.
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| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.99% p.a. | 7.01% p.a. | $3,323 | Principal & Interest | Variable | $null | $720 | 70% |
| Promoted | Disclosure | ||||||||||
7.19% p.a. | 7.74% p.a. | $3,391 | Principal & Interest | Variable | $395 | $null | 60% |
| Promoted | Disclosure | ||||||||||
7.19% p.a. | 7.65% p.a. | $3,391 | Principal & Interest | Variable | $395 | $1,254 | 70% | |||||||||||||
7.19% p.a. | 7.74% p.a. | $3,391 | Principal & Interest | Variable | $395 | $1,185 | 70% |
| Disclosure | |||||||||||
7.24% p.a. | 7.26% p.a. | $3,407 | Principal & Interest | Variable | $0 | $710 | 70% | Disclosure | ||||||||||||
7.25% p.a. | 7.65% p.a. | $3,411 | Principal & Interest | Variable | $30 | $825 | 80% | |||||||||||||
7.74% p.a. | 7.76% p.a. | $3,579 | Principal & Interest | Variable | $0 | $710 | 80% | Disclosure | ||||||||||||
7.75% p.a. | 7.83% p.a. | $3,582 | Principal & Interest | Variable | $0 | $995 | 80% | |||||||||||||
7.75% p.a. | 8.13% p.a. | $3,582 | Principal & Interest | Variable | $0 | $445 | 60% | |||||||||||||
10.00% p.a. | – | $4,388 | Principal & Interest | Fixed | $0 | $0 | 80% | |||||||||||||
7.49% p.a. | 7.51% p.a. | $3,493 | Principal & Interest | Variable | $0 | $720 | 80% |
| Promoted | Disclosure |
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