Self Managed Super Funds: Everything you need to know

In 2021, the Federal Government’s Your Future, Your Super reforms came into effect. This YFYS reform meant that the Australian Prudential Regulation Authority (APRA) was required to conduct annual performance reviews on all basic superannuation accounts without unnecessary features and fees, commonly referred to as MySuper accounts. As a result of this reform and subsequent annual performance review, any underperformance needed to be reported to the account holders, increasing transparency, and adding significant consequences.

These results prompted the receipt of letters by more than one million people across 13 different MySuper products, outlining that their chosen superannuation provider was underperforming and that other products may better suit their needs. Understandably, many people heeded this public naming and shaming through letters, and reassessed their fund choice. APRA’s heatmap shows the results of each fund assessed. You can view that heatmap here.

One way to avoid ever being the recipient of one of these letters is to reclaim your superannuation by transferring it into a self managed super fund (SMSF). The Australian Government’s MoneySmart website details that SMSFs are “private super fund that you manage yourself … When you manage your own super, you put the money you would normally put in a retail or industry super fund into your own SMSF. You choose the investments and the insurance.”

SMSF Associations‘s John Maroney reports that self-managed super funds are on the rise, as both the cost of maintaining, and overall performance of SMSFs improve. Maroney says in the years following the Global Financial Crisis, SMSF numbers “grew quite sharply as individuals sought to exert direct control over their superannuation”.  Now, statistics from the Australian Taxation Office (ATO) show that history is repeating. Compared to the last four financial year records, the 2020-2021 financial year saw the number of SMSFs being established overshoot the average by 7,312, rising to 25,312 new SMSFs. Speaking with finance and superannuation experts, it seems this number is expected to grow again in the 2021-2022 financial year as unprecedented times continue.

Additionally, assessing the performance of your superannuation fund as you draw closer to retirement is crucial, as an underperforming fund could have a catastrophic impact on the quality of your retirement. SMSFs are a great way to, as Maroney says, “control over their finances and bring things closer to home … SMSFs provide the ultimate in terms of flexibility and control – as well as far greater responsibility.”

What are the benefits?

Assessing the performance of your current superannuation fund as you draw closer to retirement is crucial, as an underperforming fund could have a catastrophic impact on the quality of your retirement. SMSFs may be the answer to your financial freedom. The Australian reports that “research by the actuarial firm Rice Warner, released in late 2020, showed, SMSFs with balances of $200,000 or more are cost-competitive with industry and retail superannuation funds, and SMSFs with balances of $500,000 or more are generally the cheapest alternative.” So, SMSF cost is essentially the same as a retail or industry super fund.

Additionally, research by The University of Adelaide International Centre for Financial Services showed that investment performance across SMSFs improves as the balance reaches $200,000, and upon reaching that threshold, “achieves comparable investment returns with APRA-regulated funds.”

What are the responsibilities and risks?

As with all things finance, every decision has risk, and the decision to set up an SMSF is no exception. MoneySmart outlined these risks very clearly, saying that by being an SMSF member, you agree that “these responsibilities come with risks:

• You are personally liable for all the fund’s decisions — even if you get help from a professional, or if another member made the decision.
• Your investments may not bring the returns you expect.
• You are responsible for managing the fund even if your circumstances change — for example, if you lose your job.
• There may be a negative impact on your SMSF if there is a relationship breakdown between members, or if a member dies or becomes ill.
• If you lose money through theft or fraud, you won’t have access to any special compensation schemes or to the Australian Financial Complaints Authority (AFCA).
• You could lose insurance if you’re moving from an industry or retail super fund to an SMSF. See consolidating super funds.”

However, MoneySmart says it’s your responsibility to research your investment options, and ensure you are abiding by the “very strict rules” in place around what you may invest your superannuation in. More information on those strict rules can be found on the ATO website, here. 

How do you assess your SMSF performance?

The final consideration for those interested in switching to SMSFs, is the performance. SMSFs are a big responsibility, and your future relies upon it. On February 24, the ATO released adjustments to their SMSF performance calculations, so that they align “more closely with the methodology used by the Australian Prudential Regulation Authority (APRA) to calculate returns for APRA-regulated funds.”

Maroney says, “All else being equal, it has been widely acknowledged that the ATO’s calculation methodology used to calculate median investment returns for the SMSF sector underestimates the true performance of SMSFs relative to the APRA sector. The 2018 Productivity Commission report into the efficiency and competitiveness of superannuation confirmed this finding.”

“The ATO’s decision to make these important adjustments is a positive step to ensure a level playing field when comparing the investment performances of the different superannuation sectors.

“However, it’s critical to note that the International Centre for Financial Services (ICFS)’s research estimated these changes, for the period of the review, would have only accounted for between 25% and 50% of the performance gap,” Maroney continued.

“Given the way the data is collated and the different data inputs (the ATO uses information from SMSF annual returns while APRA uses information from fund financial statements), the ATO’s adjusted median return calculations are still likely to generate materially lower performance estimates relative to APRA-regulated funds (all else being equal).

“For this reason, while it may be appropriate to use the ATO’s ‘median’ investment return figures to compare the performance of the SMSF sector relative to other years, they should not be used to compare the performance of the SMSF sector with other superannuation sectors.”

“The SMSF Association/ICFS research overcame these differences by using financial statement data from a large sample of SMSFs (the largest data sample ever used for this type of research) to calculate an annual return for each fund based on the same calculation methodology used by APRA to calculate returns for APRA-regulated funds.

“We also caution readers of the ATO’s SMSF statistical overview reports from using ‘average’ SMSF returns that are displayed next to SMSF ‘median’ returns to compare the sector’s performance against other sectors. For the reasons outlined in our research report, average returns that are pooled returns tend to be more representative of the investment performance of the larger funds in the data sample rather than the small funds.”

This is great news for SMSF members, and means those who are nervous about the switch to an SMSF just before retirement may soon be able to make their decision based on SMSF performance overall, with much more ease.