THE PROS AND CONS OF DO-IT-YOURSELF SUPER
Australians are increasingly doing it for themselves when it comes to super!
Self-managed superannuation funds (SMSFs) are the fastest-growing fund type in Australia, with about 410,000 SMSFs representing 772,000 members, or 7 per cent of Australia’s total super members.
SMSFs have gone from strength to strength, with each recent month seeing the establishment of around 2,500 new SMSFs. The total value of funds under management increased from $132 billion to $332 billion in the five years to 30 June 2009, an annual growth rate of 20 per cent.
But the complexity of running your own super fund means SMSFs are not for everyone – SMSF members tend to be older, have a higher income and larger super balances.
Before switching to an SMSF it’s worth asking:
- Is the fund strictly for retirement benefits?
- Do you have the time and skills to run your own super fund?
- Will the benefits be worth the costs?
- How will switching affect your current super benefits, services and fees?
The case for
An SMSF can have a maximum of four members, all of whom act as trustees and are responsible for running the fund, investing assets, paying benefits and meeting compliance requirements.
The great advantage of an SMSF is that you’re in control. Asset allocation, tax strategies, insurance options and retirement planning – it’s all up to you.
Investments
You have great flexibility over where your super is invested, as long as you comply with regulations and the fund is operated for the purpose of building retirement wealth (also known as the sole purpose test).
When planning an investment strategy, you need to consider your objectives, time horizon, risk tolerance and diversification. You can invest in your preferred combination of assets, across all asset classes – cash, fixed interest, property, Australian shares and international shares.
Tax
SMSF trustees are permitted to lodge their tax returns later than some other types of fund, allowing them to invest a greater percentage of funds under management.
Insurance
You can choose from a complete suite of insurance options, including life and trauma insurance.
Retirement
Your investment strategy can incorporate a transition to retirement strategy using a non-commutable allocated pension.
So what can’t you do? You can’t use an SMSF to fund the purchase of a business, holiday home or golf club membership. Generally, you can’t acquire assets from a related party, borrow money or allow in-house assets to exceed five per cent of the total fund assets.
You also need to be wary of schemes to withdraw your super early. The Australian Taxation Office is handing out heavy penalties for those who illegally withdraw from schemes early.
The case against
Costs
SMSFs can be expensive, with the annual costs of running a medium-sized fund estimated at $2,000. Your fund needs to be substantial enough to make this worthwhile. An SMSF is usually not advisable if the fund assets are likely to be less than $200,000. It’s not surprising therefore that the average annual member balance is $454,000 – more than six times the industry average of $70,000.
Administration
Most people find it hard enough keeping up with their current super, let alone running their own fund. When establishing the fund, you need to draw up a trust deed setting out trustee powers, benefit payments and exit strategy. You also need to create a separate bank account, keep accurate paperwork, produce annual operating statements, keep copies of annual returns and appoint an approved auditor.
Many SMSF owners choose to outsource some administration functions to reduce the amount of paperwork they need to complete themselves.
Help is at hand
With greater control comes greater responsibility, but the right financial advice and support can make it easier. Fortunately there is more help out there than ever before for Australia’s growing number of SMSF enthusiasts.
Contact us to find out about how our Self Managed Superannuation Service could assist you!