SMSFs: Are you better off managing your own super?

In recent years, self-managed super funds (SMSF) have become more and more popular. But if you look at the figures, the growth in their popularity doesn’t necessarily add up.

It’s understandable that many people enjoy the flexibility and sense of control that an SMSF offers. The ability to take control and decide where your hard-earned retirement savings is invested.

Statistics recently released by the ATO show that, before you move your super into an SMSF, it’s crucial you understand what you’re getting yourself in for.

Tasplan’s Chief Investment Officer, Dr Ian Lundy, says ‘If you think you’re going to be better off managing your own super, you could be in for a rude shock.’

According to the ATO, in the year ending June 2015, SMSFs returned 6.2%* on assets compared to APRA-regulated funds which returned 8.9%** for that same period. The smaller the SMSF, the worse the underperformance. And this underperformance was the theme for the previous five years. Despite this, the number of SMSFs has grown by 31%*.

* https://www.ato.gov.au/uploadedFiles/Content/SPR/downloads/SMSF-annual-statistic-overviews-Infographics.pdf
** http://www.apra.gov.au/Super/Publications/Documents/2016ASBPDF201506.pdf

What’s different about an SMSF?

With an SMSF, the members are also the trustees. That means that if you set up an SMSF, you're in charge. You, not your super fund, are the one making the investment decisions and you are the one responsible for complying with the super and tax laws.

Setting up an SMSF is a serious financial decision and you really need to be confident that you have the time and the skills to do it.

How much do you need for an SMSF to be worthwhile?

In 2013, Rice Warner found that the minimum cost-effective fund balance for a self-managed super funds was $200,000. This figure assumed that trustees had the necessary time and skills to do some of the fund administration themselves.

If the trustees didn’t help administer the fund themselves (see below for more on administration), then this figure increased to $500,000.

‘At the end of the day, it’s up to the individual, but it’s worth considering that it’s not just the risk of underperforming returns, it’s the time, effort and risk involved in managing your own super’, says Lundy.

‘It’s often difficult for an SMSF to access a broad range of investments at reasonable fee levels. Tasplan’s portfolio includes exposure to infrastructure, commercial property such as office buildings, and a wide range of equity and debt investments. Super is largely about wealth preservation rather than wealth generation, and diversification is an important plank in ensuring that a single investment doesn’t have too much influence on total risk.’

Administration of an SMSF

What’s involved in setting up an SMSF?

You need to decide on fund members and trustees.

  • Establish the Trust and Trust Deed.
  • Set up a bank account.
  • Register with the ATO.
  • Create your investment strategy.
  • Prepare a plan for when your SMSF ends.

Once you’ve set up, you need to consider:

  • rolling over existing super
  • organising employer contributions
  • accepting contributions within limits
  • making investments within the laws
  • regularly review your investment strategy
  • document and maintain records for up to 10 years.

Each year, you’ll need to:

  • value assets
  • prepare accounts and financial statements
  • appoint an SMSF auditor
  • lodge an annual return
  • pay SMSF levy
  • pay any tax that’s due.

When you start making payments, you need to:

  • decide if any assets need to be sold
  • ensure minimum payments are made each year
  • appoint an actuary
  • withhold tax
  • give payment summaries to members and the ATO.

When the fund is finished, you need to:

  • get a final audit
  • lodge your final return
  • pay outstanding tax
  • pay out or roll over all of the assets.
What’s right for your neighbour isn’t necessarily right for you

It’s important to consider that just because your neighbour or best friend has an SMSF doesn’t mean that you should too. It’s unlikely that their individual situation is the same as yours.

Get advice

An SMSF isn’t for the fainthearted. Setting up an SMSF is a serious financial decision. It’s a big commitment and you really need to be confident that you have the time and the skills to do it all or whether you should engage professionals to help. It’s worth bearing in mind that, even if you do engage professionals, the responsibility lies with you, the trustee.

If you’d like further information on setting up and running an SMSF, head to the ATO website. They have a great suite of videos which clearly and simply outline the work involved in managing your own super.

Is it flexibility that you’re after? Tasplan has 11 investment options

If it’s purely the sense of control that an SMSF offers that appeals to you, you might be surprised to learn that traditional super funds can also offer flexibility.

Tasplan has 11 investment options, each with a different level of risk and potential return. You can choose one investment option or a combination of different investment options. In choosing which option/s to invest in, you’ll need to consider the likely investment return, risk and your investment timeframe. For further information on investing with Tasplan, see our Investment guide.

If you’d like help deciding which investment option is right for you, simply email us or call 1800 005 166 and we will be more than happy to set up an appointment for you with one of our Quadrant First financial planners.