Time to read : 6 Minutes
Are Self Managed Super Funds A Good Idea?
In 1999 the Government made it possible for people to manage their own superannuation.
📉 The takeup wasn’t immediate but the Global Financial Crisis (GFC) hit us around ten years later.
👎🏿 This exposed management weaknesses in many larger superannuation funds.
What you need to know
Many Australian pre-retirees began to look seriously at managing their own superannuation, saving on fees and giving themselves full control over their retirement savings.
According to the latest statistics, around 1.1 million Australians now have a Self-Managed Super Fund (SMSF).
There are around 593,000 funds as of June 2020, with over $733 billion under management#.
The takeup by ‘younger Aussies’ is easing though. While the median age of SMSF members was 46 in 2018-19, it rose to 60 years in 2020.
We’re doing pretty well managing our own money too – with the last reported estimated return on assets at 6.8% according to the ATO.
🤓 So, what are the pros - and cons - of having your own SMSF? Let’s find out.
What’s a SMSF?
A self-managed super fund (SMSF) is a private superannuation fund that you manage yourself.
You can have up to six members in your SMSF.
The major difference between an SMSF and other types of funds is that the members (e.g., yourself, and/or your spouse and any other family you choose to include) of the SMSF are also directors or trustees of the fund.
This means that the members make the decisions in the fund for their own benefit only.
You and your other members are in charge of how, and where, you invest your superannuation funds for your future.
This enables you to take an active role in directing your retirement savings, rather than leaving these decisions up to a larger corporate or industry fund.
What are the rules?
All superannuation funds are required to comply with super and tax laws, and must be run for the sole purpose of providing retirement benefits for members and their dependents.
The same rules apply to all super funds including SMSFs, as well as larger funds like AMP and CBUS.
There is no way to use your SMSF funds for parties or wild vacations.
SMSFs are regulated by the ATO and all of them operate under these same regulations.
Keeping on top of the regulatory changes can be challenging.
It’s important to consider whether you have the time to manage your SMSF before going to the time, trouble, and expense of setting one up.
There are establishment fees and annual audit requirements to meet.
📋 For example, you must:
Keep detailed records of fund decisions and meetings for submission to an SMSF-approved auditor.
Create a trust and trust deed.
Register your fund and get an ABN.
Follow an approved investment path, examined by the auditor.
Assume the role of trustee to make investment decisions with legal and financial implications.
Consider insurance, including life cover, income protection and disability cover for your fund members.
Create an exit strategy for your fund, and for all fund members. This is because life throws curve balls sometimes, and your SMSF is an asset, and a legal entity.
What's your SMSF exit strategy?
What happens when your SMSF ends? Life events such as relationship breakdowns, the death of a fund trustee, or an accident that leaves a trustee incapacitated do happen.
✋Your SMSF needs a management plan for this.
Here are some strategies to consider:
Make sure that all trustees have access to the SMSFs records and accounts.
Devise some rules that can be triggered in the event of a breakdown between trustees (such as a divorce).
Create binding death benefit nominations, with annual renewals .
Require all your fund members to appoint a power of attorney.
The SMSF upside...
Running your own SMSF can be very rewarding and freeing.
🌈 Here are some of the advantages of a self-managed super fund.
1. Control
You have complete control over your fund’s assets.
You get to decide what investment path your fund takes, including taking advantage of new opportunities that ordinary super funds would not look at.
You can choose to invest multiple assets ranging from securities, managed funds, fixed interest investments, residential and commercial property, etc.
Or you can invest in one or two assets exclusively. It’s your fund - so you decide.
2. Quicker decision making
Rapid decision-making can yield good results in fund performance.
A smaller fund with a narrower asset focus can move more nimbly.
You can invest in profitable trends and exit losing trends more rapidly than a larger fund, where multiple stakeholders require consultation.
3. Lower fund management costs (e.g. no fees to bigger funds)
One of the biggest benefits of having your own SMSF is that you are not paying over a percentage of your dividends in fees to a larger management entity.
The estimated operating expense ratio on SMF is at 0.5 per cent of the profits.
That’s less than a third of the fees charged by the large corporate funds.
The difference can equate to over $250,000 more to retire on, when that time comes.
The SMSF downside...
There are a number of disadvantages to running a SMSF. It is worth thinking carefully before committing to doing so.
🧐 There are significant setup fees and the process takes some time, so bear this in mind.
1. Time-consuming
It takes time to seek out, and learn about, suitable investment paths.
Running your SMSF means being constantly on the hunt for investments that fit.
And like any corporate entity, it has administration and mandatory reporting requirements.
2. Financial & legal risks in decision making
Without a background in finance and tax, setting up and managing an SMSF can be quite a challenge - though these are skills that you can learn.
Poor investment decision making can have financial and legal consequences, especially in matters of taxation.
It can also lead to conflict with other trustees.
3. Inability to access government compensation schemes
😨 It’s worth noting that SMSFs are not eligible for government compensation schemes in cases where money is lost, including those outside the control of the trustees.
For example, some larger pension schemes were bailed out by the government during the GFC, but such rescue packages do not apply to SMSFs.
4. Reduced access to dispute resolution bodies
There is limited access to dispute resolution bodies for SMSFs.
This could mean your fund is at greater risk of negative consequences, should the directors and/or trustees find themselves in legal trouble.
5. Setup and management costs
Setup of your SMSF is usually handled by an accountant or trained financial planner.
It costs upwards of $900, but usually around $4,000-$5,000.
This fee is only required to be paid once, though there are maintenance costs for SMSFs
Ongoing fees include auditor costs, and filing tax returns with the ATO, as well as any additional account keeping costs.
This can run from a few hundred dollars per year, to a thousand or so.
Winding up your SMSF also has fees attached to this, so ensure the fund can cover this, or else the trustees (i.e. yourself and/or your family) will be required to do so.
SMSFs also don't come with default life insurance so you'll need to get your own.
The bottom line
To self-manage or not to self-manage?
🤔 The decision to put your superannuation into an SMSF should not be taken lightly.
If you are considering setting up your own SMSF, it’s a good idea to speak with an experienced financial expert.
With their help, you can weigh up the pros and cons of an SMSF and work out if starting one is right for you.
