As anyone who has joined the weekend crowd at Bunnings knows, Australians love to DIY. And that same can-do spirit helps explain why 1.1 million Aussies choose to take control of their retirement savings with a self-managed superannuation fund (SMSF).
Aside from control, one of the primary reasons for establishing an SMSF is the investment opportunity. As an example, these are the only types of super funds that allow you to invest in direct property, including your small business premises.
Other reasons people give are dissatisfaction with their existing fund, more flexibility to manage tax within the fund, and greater flexibility in estate planning.
What type of person has an SMSF?
Think again if you believe SMSFs are mainly for rich seniors.
The average age of those who start an SMSF has been decreasing, and it is now between 35 and 44. Over half of SMSF trustees hold or have operated a small business, and more than half have held their fund for more than ten years.
They’re also dedicated. The majority of SMSF trustees say they spend 1 to 5 hours a month monitoring their funds.
But having an SMSF is not for everyone. There has been an ongoing debate about how much you need to have in your SMSF to make it cost-effective and whether the returns are competitive with mainstream super funds.
So, is an SMSF right for you? Here are some things to consider.
The cost of control
The accountability of complying with superannuation requirements comes with running an SMSF, which takes time and money.
There are set-up costs and a range of ongoing administration and investment costs. These might vary significantly depending on whether you handle most of the administration and invest yourself or hire professionals.
A recent survey by Rice Warner of more than 100,000 SMSFs found that annual compliance costs ranged from $1,189 to $2,738. The yearly ASIC charge, the ATO supervisory levy, the audit fee, the financial statement, and the tax return are examples of fundamental expenses that cannot be avoided.
If trustees decide they don’t want any involvement in the administration of their fund, the cost of full administration ranges from $1,514 to $3,359.
Depending on the sort of assets you have, there is an even larger variety of ongoing investment costs. Fees for funds with investment property tend to be the highest due to the higher cost of servicing direct property and the higher administration costs for accounting and auditing.
As a general guideline, the more money you have in your SMSF account, the more cost-effective it is to operate.
According to the Rice Warner survey:
- Funds with $200,000 or more in assets are cost-competitive with both industry and retail super funds, even if they fully outsource their administration.
- Funds with a balance of $100,000 to $200,000 may be competitive if they use one of the cheaper service providers or do some of the administration themselves.
- Funds with a value of $500,000 or more are generally the cheapest alternative.
Returns also tend to be better for funds with more than $500,000 in assets. While returns will depend on the investments in your fund, average returns for the sector have tended to lag those for other types of super funds.
Even though SMSFs with a balance of under $100,000 are more expensive than industry or retail funds, they may be appropriate if you expect your balance to grow to a competitive size fairly soon.
In 2019, only 8.5 percent of SMSFs had assets worth less than $100,000. Most of these small funds tend to grow quickly via ongoing contributions, or close, once retirees in the pension phase wind down their funds.
While SMSFs provide you with greater flexibility, it doesn’t imply that you can do everything you want. Every member of your SMSF has legal responsibility for ensuring the fund complies with all the relevant rules and regulations, even if you outsource some functions.
The ATO regulates SMSFs, which keep a close watch on the industry and penalises those who disobey the rules. And there are lots of rules.
The most important rule is the “sole purpose test,” which dictates that you must run your fund with the sole purpose of providing retirement benefits for members. You can’t merely tap into your retirement savings when you’re short on cash since fund assets must be kept separate from your personal assets.
Don’t overlook insurance
If you transfer the balance of an existing super fund to an SMSF, you may lose your life insurance coverage.
Large super funds often provide life cover at discounted group rates. As a result, you may need to organise new plans to guarantee that you and your family are not left without enough coverage. Some people leave a small amount in their previous fund to maintain their cover.
If you would like to discuss your superannuation options and whether an SMSF may be suitable for you, don’t hesitate to call.