Ever figured you could do a better job than whoever it is that manages the investment of your superannuation savings? Plenty of people do figure just that. According to the Australian Taxation Office (ATO), more than a million people use a self-managed super fund (SMSF) to direct the investment of their retirement savings.
According to some promoters, an SMSF is a good way of taking control of your finances. They say an SMSF is a modern way of investing for every smart retirement saver – a bit like owning a pug or a French bulldog is for dog-fanciers.
But just as buying a pedigree pup (or, indeed, a non-pedigree one!) is a decision that should only be made with a long-term view on time and cost, making the decision to run what is effectively your own super fund requires the same kind of serious commitment.
For a taste of what it takes to run an SMSF, it’s worth checking out the ATO’s compliance requirements for SMSFs in order for the fund to benefit from the tax concessions available on superannuation. Just to set up your SMSF, the ATO says you must:
And that’s before you invest any money!
Once your SMSF’s up and running, you’ll need to implement the fund’s investment strategy, arrange for an annual valuation of the fund’s assets and complete and lodge various regulatory returns.
You can engage professionals to do a lot of the work but that involves additional costs – according to the ATO, an SMSF costs on average $13,300 a year to run in the accumulation phase and $15,300 in the pension phase – and in any event, the trustees are still responsible for the fund’s ongoing compliance.
So if you’re thinking about starting your own SMSF, and particularly if you’re attracted to the idea of using your fund to buy a property, it’s important to do your homework.
Gemma Pinnell, director of strategic engagement at Industry Super Australia, says SMSFs can work for some people.
“But you’ll need to seriously consider the time, cost and responsibility involved, as well as the likely returns,” she says. “Before you do anything, it’s important to get professional financial advice, preferably from somebody who doesn’t receive commissions from recommending products.
“If you’re looking at transferring your savings from another fund to an SMSF, you should also check to make sure you’re not losing valuable insurance benefits,” she says.
There’s something else to think about, which is how much money you’ll need to start an SMSF.
In late 2019, the Australian Securities and Investments Commission (Asic) warned that it would look more closely at cases where advisers recommended that any person open a SMSF with a starting balance of less than $500,000. Asic said that on average, SMSFs with balances below $500,000 had lower returns after expenses and tax and would often be uncompetitive compared to other options, such as Industry SuperFunds.
Even more worryingly, in a 2018 report to the Australian government, the Productivity Commission said all but the largest SMSFs had underperformed; the best-performing SMSFs were those with balances above $2 million.
Pinnell says that’s an indication that while SMSFs might be suited to financially astute, wealthy individuals, most people would get greater benefit from the low fees and consistent returns offered by Industry SuperFunds.
Even in 2019/20, a year which saw the Australian stockmarket suffer one of its biggest declines in history, Industry SuperFunds made, on average, a small loss of less than 1 per cent. And over a five-year term, returns were around 6 per cent, despite the impact of Covid-19 on financial markets*. (You can find the full range of Industry SuperFunds here.)
The ATO hasn’t yet released performance data on SMSFs for 2019-20 but in 2018 the ATO did release a report that compared SMSF performance against that of super funds regulated by the Australian Prudential Regulation Authority (Apra) – Apra regulates all publicly available super funds so that includes retail funds run by banks, insurers and investment companies, as well as Industry SuperFunds – and the results for SMSFs were mixed.
While acknowledging that directly comparing Apra-regulated funds and SMSFs is difficult because the regulator collects different data on each, the ATO found SMSFs on average underperformed regulated funds on investment returns from 2013-15, performed roughly equally in 2016 and in 2017 outperformed regulated funds, but by a less significant margin than the outperformance of regulated funds in 2013-15.
One of the biggest selling features of an SMSF is the ability to choose your own investments, causing some potential investors to imagine they can ‘invest’ in assets that may offer them other lifestyle benefits. But Pinnell warns there are restrictions on where you can put your money and, potentially, problems with a lack of diversification.
“Some people like the idea of an SMSF because it’s possible to buy a property with your super,” she says by way of an example. “But particularly where people already own property in the form of the family home, buying more property with your super is putting a lot of your eggs in one basket. You’re also not permitted to use an SMSF to buy artworks for your home or a holiday place you can use yourself.”
“And if the ATO finds your fund is in breach of the rules, the penalties can be significant,” she adds.
Pinnell also suggests people might not be aware of the range of investment options offered by Industry SuperFunds.
“It’s possible to split your investments across a range of different options, such as Australian shares, balanced or conservative,” she says. “Also, many Industry SuperFunds offer self-directed options, which means you can have much greater control, including the ability to invest in some of Australia’s leading ASX-listed companies and property trusts.”
Starting your own super fund can be expensive and as many people are discovering, the rewards of running your own show often aren’t worth the effort.
As the Australian Financial Review noted early last year, “… the strong performance of large industry superannuation funds is triggering SMSF members to question whether they should retain their SMSF or look to switch to an alternative fund option”.
Pinnell says in the 2018 financial year, around 25,000 SMSFs were established but more than 20,000 were wound up.
“Often, people open an SMSF with good intentions, but later find the professional management and low fees of an Industry SuperFund outweigh the benefits of going it alone,” she says. “If you’re in any doubt whether an SMSF is right for you, or you’re not sure about whether you should keep an existing SMSF, all Industry SuperFunds have qualified advisers who can help you make the best decision for you.”
*Past performance is not a reliable indicator of future performance and should never be the sole factor considered when selecting a fund.