‘Should we stick with our SMSF or transfer our $570K to a super fund?’

Q: My wife and I have about $570,000 in a self-managed super fund. We are both retired and are on a part-Age Pension. We have decided to reduce our holdings in the stockmarket and take enough cash to last us for about two years or so. Given the compliance costs associated with maintaining a SMSF, we have been advised to close it down and transfer the assets while still in the superannuation phase. Is this the best option?

A: This is a very interesting question and one which is being asked more and more often these days. The ATO and ASIC have been undertaking significant work on the issue of the costs and efficiency of self-managed super funds compared to public offer superannuation funds.

One issue raised was the relative cost of running a SMSF compared to the costs of a public offer superannuation fund. It is the view of the ATO that many funds are too expensive relative to public offer funds often because the amount of money in the fund is relatively small and the cost of running the fund is relatively fixed. Because every SMSF has to lodge a tax return with detailed financial statements, the ATO has considerable information about the costs of running funds. The research is somewhat controversial because SMSFs report in different ways and it is difficult to compare ‘apples with apples’. There is a broad view across professional advisors that an SMSF should have at least $500,000 in assets to comfortably absorb the average cost of running a fund and thus be competitive with the average cost of public offer fund such as industry or retail superannuation funds.

In this regard, the amount you have in your fund, is ‘theoretically’ sufficient to justify its continuation. However, without knowing the specific details of the costs of running your fund and undertaking a comparison with suitable alternative public offer funds I am unable to assist in determining whether you should retain your fund on a cost basis only. Every advisor is legally required to provide you a detailed comparison of the complete costs of running your SMSF compared to the alternatives.

However, cost is only one aspect in relation to whether you should have your own fund. The other issues to consider include:

• The additional time and effort required by you as trustees of the fund – this all disappears if you use a public offer fund
• Ensuring that you understand your duties and obligations as a trustee of the fund – if you do not perform your duties as required as a trustee of your fund there can be significant penalties.
• Record keeping and reporting requirements – these are your responsibility with an SMSF whereas all of this is handled for you in public offer funds. Also, public offer funds typically provide online and timely updates of your investment portfolio which is not always available in an SMSF.
• Investment choice and flexibility – a typical argument for using a SMSF is the additional choice available for investments. However, in practical terms the only type of investment you can hold in an SMSF compared to public offer funds is direct property. With $570,000 in your fund there would be very limited ability to use direct property anyway.
• Controlling your own fate – a constant argument for having your own fund is your ability to control your affairs more completely. Whilst this is partially true, many public offer superannuation funds offer significant flexibility and choice enabling you to have a relatively high degree of control over your investments in super.
• Investment performance – proponents for SMSF’s argue you can obtain a better return on your investments in superannuation because of the choice, flexibility and control available. However, there is no convincing evidence of this outcome.

You should ask your adviser to provide you with a detailed summary of both the advantages and disadvantages of continuing with your own fund compared to the alternatives so that you can make a fully informed decision.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.