An increasing number of Australians are choosing to manage their own super funds, with over 572,000 self managed super funds (SMSFs) in operation.1
Being in control of your own retirement nest egg is appealing – especially with more flexibility over the types of assets you invest in.
However, there are also significant administration and compliance requirements involved. So before you jump on the ‘selfie’ bandwagon, check it’s the right option for you.
An SMSF has a maximum of four members, all of who are generally trustees (or directors of a corporate trustee) responsible for running the fund, investing in assets and paying benefits. This makes it possible to set up a fund to cover your whole family – the most common structure involves members of a couple, with around 70 per cent of SMSFs having two members.2
Like a retail or industry super fund, an SMSF must be set up solely for the purpose of providing benefits when you retire or when you reach 65 (or when you pass away, if that’s earlier).
There are a few unique advantages to managing an SMSF. You have a hands-on role in deciding how much risk you’re prepared to take on and how your retirement savings are invested – and you can quickly adjust your portfolio to respond to market change.
Typical investment options include local and international shares, cash and term deposits, bonds, exchange traded funds and managed funds. SMSFs can also invest in direct property. SMSFs can facilitate borrowing to invest via a limited recourse borrowing arrangement (LRBA), which is designed to ensure that your SMSF's other assets are not put at risk as a result of the borrowing.
The cost of this borrowing is generally higher than a standard investment home loan.
Pooling your super balances between a few fund members can give you more investment power, and potentially keep administration costs per person lower. SMSFs also enjoy all the tax benefits of super – as you’re accumulating wealth your fund’s investment income is taxed at 15 per cent, and capital gains tax is 10 per cent. Once a pension has commenced (ie in retirement), earnings are tax free.
Recent reports indicate smaller balance SMSFs may not be performing as well as their members had hoped – and those with balances of less than $250,000 may not be as cost-effective as letting a retail or industry fund manage it for you.3
There are costs involved in managing your own super, including:
- Set-up costs (creating a trust deed)
- Fixed operating costs (annual audit, tax, legal advice and lodgement)
- Transaction costs (changes in your investment allocations)
- Asset valuation costs, if applicable.
Then there’s compliance, which can also be time-consuming. Your SMSF must be professionally audited every year for both compliance and financial transactions. If you breach your obligations as a trustee, the Australian Taxation Office may impose fines to the trustee, which can be substantial.
Other disadvantages of SMSFs include:
- No statutory compensation scheme in the event of fraud or theft
- No access to the super complaints tribunal to resolve issues
- Reliance on own investment skills and experience
- Potential complications with estate planning, if those in charge of the fund after death are eligible beneficiaries.
In addition, changed circumstances (such as the breakdown of a relationship, being disqualified from being a trustee, or spending an extended time overseas) can dramatically impact the fund and may mean that it potentially needs to be wound up.
Most people set up their SMSF through their accountant, or a specialist administration provider.
They can help you with the paperwork and decisions involved. You’ll need to decide whether to set up as an individual trustee or a corporate trustee, and then set up an investment strategy for your fund to follow. Its core goal should be to provide a sustainable income stream in retirement, but there are many different ways to achieve that. Under the law, investment strategies have to consider risk and return, diversification and liquidity. If you decide to set up an SMSF you are personally liable for all the decisions made by the fund even if you get help from a professional or another member makes the decision.
As part of your investment strategy, trustees are required to consider holding life, Total and Permanent Disability and income protection insurance cover for each fund member.
It’s also a good idea to work out an exit strategy in advance, as one day you’ll need to wind your SMSF up and dispose of your assets.
Before you set the wheels in motion, ask yourself:
- How much time do you have for administration, record-keeping, reporting and compliance? This can be onerous, so if you don’t have time you’ll need to find a professional administration provider to manage it for you.
- How experienced are you in making and executing your investment decisions, and making sure you meet your legal obligations?
- How much do you already have in super? The more you have, the less impact any fees will make on your returns. The Australian Securities and Investments Commission (ASIC) recommends a minimum balance of $200K to make it cost effective.4
Managing your own super doesn’t mean you have to do it all yourself. It’s very important to seek professional advice first, given the extent of your legal, tax and compliance responsibilities.
To make sure your fund is well managed, you may want to appoint an administrator or an accountant to manage most of the day-to-day running, a financial adviser to help you choose and monitor fund investments and insurance, and a superannuation, tax or legal specialist for more complex decisions.
1 Self-managed super fund statistical report March 2016, www.ato.gov.au
2 Thinking about an exit strategy for SMSFs, http://www.theaustralian.com.au/business/business-spectator/thinking-about-an-exit-strategy-for-smsfs/news-story/99575da12d3eef0f2daa8ebec57d6a0c
3 Why small SMSFs are losing money: the $595b self-managed time bomb, http://www.smh.com.au/business/banking-and-finance/why-small-smsfs-are-losing-money-20160609-gpf0al
4 Advice on self-managed superannuation funds: Disclosure of costs, Australian Securities and Investments Commission, asic.gov.au