A self-managed super fund can do badly if it isn't run well, and running one well takes more than a good investment idea. Here are ten mistakes new trustees often make.
Mistakes when starting out
1. Starting without thinking it through
Some people set up a fund because they like the idea of choosing their own investments, then find it costs more time and money than they expected. A fund needs enough money in it, and enough cash on hand, to cover its running costs and still invest sensibly. Talk to a licensed financial adviser before you start.
2. Thinking "self-managed" means "no rules"
You do manage your own fund, but you manage it inside the superannuation laws. As a trustee you are responsible for following them, even when someone else does the paperwork.
Mistakes as a trustee
3. Not planning
Every fund must have a written investment strategy, and trustees must review it regularly. Investing without a plan, then dealing with the results, is one of the most common problems.
4. Poor investment choices
Not every trustee is an experienced investor. Putting too much into one asset, or into something you don't understand, can do lasting damage to your retirement savings.
5. Paying fees you don't need to
Late lodgement and breaches of the rules can lead to penalties. Set-up and running costs vary widely, so ask what each service will cost before you agree to it.
Mistakes around the audit and the return
6. Breaching the rules
The ATO regulates SMSFs, and what your fund invests in and pays out must follow the superannuation laws. An approved SMSF auditor checks the fund each year and must report certain breaches to the ATO, which can then apply penalties.
7. Lodging the return before the audit
The SMSF annual return can only be lodged after the fund's audit is finished. Have the fund audited first, so any error in the financial statements is found before the return goes in.
8. Errors in the annual return
The return reports the fund's income tax, its regulatory details and its members' contributions. Mistakes cause problems with the ATO and with members' contribution caps, so have the accounts prepared carefully and audited by an approved SMSF auditor.
Mistakes with property
9. Putting everything into one property
A single property can leave a fund with most of its money in one asset, in one place. Think about diversification, and about whether the fund can pay its costs and any pensions while the property is held. Location matters: an area that depends on a single industry carries more risk.
10. Borrowing outside the rules
An SMSF can only borrow in limited ways, usually through a limited recourse borrowing arrangement that follows strict rules. Learn them, and get advice, before the fund signs anything.
If you're a trustee, your accountant or financial planner can help you avoid these mistakes.