Why are Self Managed Super Funds becoming so popular?
Self Managed Super Funds (SMSF) has grown in popularity over the past 10 years and has seen a spike in the last 3-4 years. The main reason for this is the poor performance of industry and retail funds. There are a number of advantages of a SMSF but there are also some pitfalls around them. Let’s look at the pros and cons of a SMSF.
For most of us apart from our house, our super will be our largest asset. However, unlike our house most people do not really understand their super. Most people gauge the performance of their super based on whether it is going up or down and not relative to a benchmark.
The performance of your super is based on a couple of factors including fee, advice, risk, tax and contributions;
1. Fees – never compare on fees alone. If higher fees come with better advice and results, they add value and are worth paying. On the other hand, if you have lower fees but no advice then you are being ripped off. Industry funds normally charge just over 1.2% in fees, retail funds around 2% and SMSF with an average balance of $500,000 will cost around 1.4%. The difference with a SMSF is as the balance goes up the fee percentage goes down, as many of the costs are a fixed price. Unlike Industry and retail funds where the percentage stays the same. If you run the SMSF yourself, then the costs can be as little as $3,500 per annum.
2. Advice – the more advice you get the more it will cost you. But do not discount advice, getting the right advice on salary sacrifice, concessional and non-concessional contributions, age pensions, account based pensions, transition to retirement pensions, retirement age and when and how to invest will save and make you more money than the fees you are paying.
3. Risk – in general the more risk you take the greater the reward. However, you need to know when to take that risk and when not to. During the GFC a fund sitting in cash has outperformed shares and property. However, since 2009 shares have made 11% pa compared to cash at 5%.
4. Tax – how much tax you pay on your investments determines what return you will receive. Always try to make sure that your investments are held in low tax structure. Super has the lowest tax structure at 15% which makes it the best structure to invest through.
5. Contributions – long-term performance requires a long-term commitment. Regular savings will produce a better result overall. The compounding affect of dollar cost averaging over time will ensure a better return over the long term.
A SMSF gives you control over your money. You get to choose where the money is invested, who will provide you advice and the level of risk you want to take.
You can invest directly in shares, property, cash, managed funds or other direct assets such as gold or paintings etc.
If you have your own SMSF then there are a number of statutory reports and meetings, which need to be held every year. The compliance is not overbearing but you do need to make sure that you get the right advice, as any breach is costly.
I always recommend that you employ an Accountant or Financial Adviser who deals with these matters on a daily bases to assist you. Sure it might add another cost but it will be less then what it will cost you if you make a mistake.
Compliance is mostly centred around Financial Statements, Audits and Tax Returns. It also covers how you get money into and out of super.
If you have a SMSF you will be required to put some personal time into administration, discussions with advisers, and decisions on what to invest in and reading advice provided. The more you put in the better the result. If you have no interest in your future then a SMSF will seem like a lot of hard work.
Should You Have a Self-Managed Super Fund?
If you have over $250,000 in super combined with your spouse and earn over $80,000pa then you need to at least speak to someone about a SMSF. First up you will start to save on fees and reduce your tax.
I find that people who want to take control of their future, who are looking for a better return and are prepared to put in more effort for a better return are best suited to a SMSF.
I also find that these people generally have more funds in retirement and are able to retire sooner.
If this sounds like you, give us a call and we will walk you through SMSF and see if it is a fit.
For more information please contact us on 07 4771 4577.
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