A self-managed super fund (SMSF) is a private super fund that you manage yourself. It can have up to four members (though the Government has proposed increasing this to six from next year), all of whom are trustees and responsible for decisions and compliance with laws.
Clearly, a lot of people like that idea: in 2015-16 there were almost 600,000 SMSFs with more than 1 million members. Together, they had combined assets of almost $700 billion, representing 30% of the superannuation sector in Australia, according to the Australian Tax Office (ATO).
All those people can’t be wrong, can they? Well, no, not all of them...
OK, so why would I want an SMSF?
You get to choose exactly how your super is invested. And you don’t have to pay fees to super funds.
Great. How do I set one up?
Decide on fund members and trustees, establish the trust and trust deed, set up a bank account, register with the ATO, create an investment strategy and include a plan for when the SMSF winds up.
Too easy. What’s involved in running it?
Time and expertise. You need to set aside a few hours a week to manage the fund (though you could hire an administrator to do some of that work for you). You also need to engage an SMSF auditor. In some circumstances, you might also need an actuary. Each year, you’ll need to value your assets (in some cases using an independent valuer). You’ll also need to prepare financial accounts and statements each year (perhaps through an accountant). Other professionals you might engage include a tax agent, a financial planner, an investment manager, and legal, tax or superannuation specialists. But note, even with professional assistance, you will remain legally responsible for decisions and will need to remain at the helm, running the SMSF.
But surely the returns will make it all worthwhile...
Don’t bank on it.
In 2015-16, the average return for DIY funds was 2.9%, according the ATO report, Self-managed Superannuation Funds – A Statistical Overview 2015-2016. This was the same as the APRA-regulated super fund average return that year (though considerably lower than the industry super fund average return of 4.1%).
Almost 3% doesn’t sound too bad a return, but 86% of SMSFs did not achieve that figure. Smaller SMSFs – with assets of less than $500,000 – performed woefully, with returns ranging from zero for funds worth $200,000-$500,000, to negative 16.7% for funds with assets of less than $50,000.
So, size matters?
It appears so. SMSFs with assets of $500,000-$1 million earned returns of 1.4% in 2015-16. SMSFs from $1 million-$2 million earned 2.2%. And SMSFs worth more than $2 million earned a healthy average return of 4.3% – the only sector to outperform industry super funds.
“SMSFs with assets over $2 million seem to do okay,” says Industry Super Australia head of consumer advocacy, Sarah Saunders.
“Industry Super Australia analysis suggests SMSFs are unsuitable for the average person. SMSFs can work well for sophisticated, high-wealth individuals.”
Doesn’t sound quite so DIY any more…
No. And you have to consider whether the cost of engaging professionals will offset any gains you make from not paying fees to a super fund.
SMSFs can work for some people. But you need to seriously consider the time, cost and responsibility involved, as well as the likely returns.
Before you do anything, make sure you get advice from a financial planner or professional – preferably one who does not receive commissions for recommending products.
What about other benefits? Can I use an SMSF to buy anything I want?
No. There are lots of rules governing what an SMSF can invest in, “and serious consequences for you and your fund if you get it wrong,” says the Australian Tax Office (ATO).
“An SMSF must be run for the sole purpose of providing retirement benefits for the members or their dependants. Don’t set up an SMSF to try to get early access to your super, or to buy a holiday home or artworks to decorate your house. These things are illegal.”
Any other downsides to think about while we’re at it?
If you roll your super into an SMSF, you may lose any insurance policies you had in your super fund, such as life insurance, temporary and permanent disability insurance, and income protection insurance. Super funds often provide these policies at discounted rates. In an SMSF you’ll have to source your own insurance, and you might want to check what your premiums will be, especially if you’ve had any health issues in recent years.
You might also want to think about what would happen if you fall out with the other members of your SMSF.
Also factor in what’s involved in winding up an SMSF – the process can be quite unwieldy.
Oh, and unlike APRA regulated funds such as Industry SuperFunds, SMSFs are not protected by a statutory compensation scheme that covers loss in the event of theft and fraud. Some SMSF investors have been defrauded out of their life savings.
What are the alternatives?
If you want more control over how your super is invested, have a look at the investment options within your existing super fund.
You may be able to split your investments across different options, such as sustainable, high growth or balanced. And many Industry SuperFunds offer self-directed investment options that allow members to control their investment options – right down to the ability to invest funds in individual companies.
If you don’t like what your super fund has to offer, consider switching funds. You could start by looking at Industry SuperFunds: AustralianSuper, Cbus, HostPlus, HESTA, MTAA, CareSuper, NGS Super, Media Super, TWUSUPER, AustSafe Super, Energy Super, First Super, legalsuper and REI Super.
Industry SuperFunds have low fees, a range of investment options and are run to profit members, not to generate dividends for shareholders.
They’ll never give you quite as much control as an SMSF, but that’s not necessarily a bad thing.
This article was first published by the Guardian on 20 November 2018. The information referred to may change from the date of publication and care should be taken when relying on such information.
*The above material, whilst correct at the time of publication may include references or statements which are no longer current.