Do you need a Self-Managed Superannuation Fund? (SMSF)

Do you need a Self-Managed Superannuation Fund (SMSF) …or do you just WANT one? 
SMSF’s are an absolute boom industry in Australia. There are around 600,000 of them operating and well over a million members involved in them.
 
So, are they a good idea?

Fran looks at the pro’s and con’s to help you make the right decision.

Reasons to have an SMSF

There are four reasons you may find a Self-Managed Superannuation Fund is for you:

1. Control is the big one.

That superannuation fund is OURS and no-one is going to care about it as much as we do. We could do better than the faceless minions toiling away in the cubicles of the business and banking world, right? We’re financially savvy and every investment decision we’ve ever made has been great, right? Well, maybe not but it’s our money and if we’re in control of it we’ll know exactly where it is and what it is doing. We get to choose the assets we buy, not just selecting “balanced” in the offered fund alternatives.
 

2. Reducing fees.

If you’ve got a few dollars in superannuation and the fund managers are pocketing 2% every year to manage it for you, it can look appealing to take over. This would mean replacing management and the ‘variable balance-based fees with ‘set fees’ for only doing the required tax reports and audits. There is a bit of a tipping point where this makes sense. If you’re paying fees above $4000 (2% of $200,000 being $4,000) you might see an advantage in having an SMSF where the annual fees could be well be under $3,000.
 

3. Keeping it in the family.

An SMSF is a good option for family units. They can become like a family business and build towards common goals shared by family members.
 

4. Loans.

You can now use your SMSF for asset loans. This has opened the door for investing in real estate even if your fund doesn’t have enough to pay for the asset in cash. However, it’s important to note there are strict guidelines to follow. 
 

Reasons not to have an SMSF

There are six reasons a Self-Managed Superannuation Fund might not be right for you:

1. Have you got the time?

There is a significant amount of time required for managing the fund and doing administrative tasks. A third of people quizzed about this aspect said it took much more time than anticipated. The time required will depend on how active the management needs to be. You’ll need to watch the investments and discuss strategies with other members. You’ll also need to liaise with accountants, property managers and bankers.
 

2. Performance is key.

To justify the cost, time, and effort required your fund will need to out perform industry standards. The net earnings should be level or above industry offerings to justify the effort. Keep in mind you’ll be competing with trained and experienced investors. It is important for members to discuss whether the effort is worth the reward.
 

3. Keeping it in the family.

We all know family and business can be a difficult mix. Conflicting views on investment strategy, relationship breakdowns, and uneven commitment. For example, if one members feels they contribute more than another, they could feel disadvantaged. These can all have a flow-on effect interfering with the performance of the SMSF. 
 

4. Insurances.

Commercial or industry funds can offer well priced group policies. Unfortunately, in an SMSF you won’t have access to these and would need to organise your own insurance.
 

5. They keep changing The Rules!

Superannuation is a pot of gold that the government is trying to tap into by changing taxation rules. The Government have set new limits on how big a fund can be to remain on lower tax rates. The recent threat of removing refunds for input tax credits would also have an affect on SMSFs. Although, making long term plans when the rule framework is uncertain may not be something you want to do. It means keeping up with changes that may impact your decisions down the track. It’s important to include this in your regular maintenance.

You can read more about the Input Tax Credits threat HERE

6. Liability.

The trustees of the SMSF will be responsible for actions taken by your SMSF. It is important to follow the guidelines you’ve had written into the Trust Deed when the fund is set up. There are strict laws and taxation rules, and ignorance is no defence if they’re broken.
 
 
As you can see, there is a lot to think about if you’re considering a Self-Managed Superannuation Fund. Before steaming ahead, talk about these points with the people you’re going into an SMSF with. It’s important to have good communication and understanding about these topics before proceeding.
 
If you’re re-thinking the idea of an SMSF, there are some alternatives to explore. Consider the “do-it-yourself” style of fund offered by some Superannuation Providers. These allow you to make detailed choices about your investments.

Here’s some excellent general information from ASIC to read through:

5 Simple Steps to Understand and Review your Superannuation Statement

Oh yay I’ve got my Superannuation Annual Statement!  

Fran’s put together 5 Simple Steps to help you Understand and Review your Superannuation Statement:

Firstly, pat yourself on the back. You’ve kept your contact details up to date and your fund knew where to send the statement. Secondly, you opened the envelope.. that’s a good start!

You’ll need to resist the urge to file it away, and make some time for a basic review.  The ‘Productivity Commission Report on Super‘ presented in November 2018 is full of reasons why you need to give this document a look over.

There’s lots of information laid out for you and this is a great time to review your decisions.

Why your superannuation statement is important

This little pot of gold must grow to maintain your lifestyle for 30 or 40 years after you retire!

The report uses an example of an employee starting work at 21 and retiring at 65. On a constant salary of $50K per annum, they will have $100,000 less (12%) in their fund if they paid just 0.5% more in fees each year. Your money is in the fund for a LONG period of time and small charges can have a big impact over the course of those years.

Understanding your superannuation statement

Here’s a step-by-step process to help you review your superannuation statement:

1. Check your details are correct.

Address, contact information, date of birth, tax file number and so on.  If you think you’re missing a statement, the address is the most likely problem.

You should also jump on the ATO website and check for any superannuation you may have lost track of.

If you have a MyGov account, check there first (here’s some instructions from Lacey on how to do that), or click on this link for a form to request help with locating lost superannuation:  https://www.ato.gov.au/forms/searching-for-lost-super/.

2. Locate the summary

This shows your opening balance, benefits paid and deductions.

Opening Balance

If you have your previous report, the opening balance on your new superannuation statement should be the same as the closing balance on the prior one.

If you have only one fund, the contributions should equal the compulsory rate of 9.5% of your income.  So if you’ve earned $80,000 according to your PAYG Statement, the contributions should be at least $7,600. Some companies pay higher than the minimum. You’ll find a transaction report included in your statement to show the deposits made to your fund. If the amounts don’t look right, look into it in more detail.

Benefits Paid

Next, look for the summary of benefits “paid” to see what has been paid out of the fund. Generally this will be pension payments and other deductions such as fees, tax on your contributions and insurances. We’ll go into more detail with these in the next steps.

Now let’s look at your net earnings.  This will show you how much your super fund earned.  It could be from interest or successful investment. After deducting the expenses, your fund will deposit the net earnings into your account. This amount should be positive and somewhere between 2% and 10% of your account balance.

Closing Balance

Lastly there will be a closing balance on your superannuation statement. This is the net value of your fund at the end date of the report.

Your balance will be divided into 3 sections:

  • Preserved – money you cannot access until you meet a condition of release, most often this will be reaching your preservation age (somewhere between 60 and 70 depending on your birth year)
  • Restricted non-preserved – some amounts paid in before 1/7/1999
  • Unrestricted non-preserved – amounts you can withdraw without meeting a condition of release (generally after-tax contributions you have made)

Hopefully the balance gives you a reason to smile!

Although it may be locked up for now, this is your money, and some day it could make a huge difference to the quality of your life. It’s important to keep track of it and do whatever you can to make sure that balance keeps growing.

3. Review your current investment choice.

Most funds offer a range of different investment types. If you don’t make your own selection, you’ll be placed in a default fund based on general criteria such as your age.  These funds may be called “balanced” or “growth” funds or they may also be comprised of a single type of investment like “Australian Shares”.

The investment choices are categorised according to the degree of risk associated with them. Funds that have their money in bank deposits and bonds will be low risk. Funds that have invested in shares will be high risk.

Risk ‘Rules’

The general rule is, younger folk (whose money will be in the fund for decades) are allocated into higher risk investments and older folk (nearing retirement) are allocated to low risk investments.  It makes sense, but this is certainly an area where your choices could effect the growth of your nest-egg.

Most superannuation funds allow you to allocate your funds by percentages. For example, you might specify 80% in balanced funds and 20% in growth funds, or you can select from the particular offerings with this provider.

No doubt about it, this is one of the most confusing and difficult matters when thinking about your superannuation.

We have approximately 40,000 different Superannuation Products in Australia to choose from, and no comparison website is going to cover more than a handful of these.

Add to this the overbearing reality that past performance really is NO GUARANTEE of future performance, and you could be forgiven for deciding you’ve heard enough!

The truth is, we’ve had a long period of good economic conditions and it’s been 10 years since the GFC and the horror stories of superannuation balances disappearing overnight.

Don’t Panic!

Don’t panic about which individual investments to choose, instead check which type of investment your money is in and whether you can sleep well with that selection. If you’re not comfortable, contact your fund, change it, and move on.   You could change the percentages each year, or every few years, or perhaps you’ll start out with high risk funds and move it down to lower risk as you near retirement.  You can get as technical with this decision as you like by looking into detailed reports on the performance of each option, or you could choose on the basis of risk levels.

The people whose funds didn’t take a big hit in the GFC were those who reacted by moving their superannuation into a “cash” option. Most superannuation funds allow you to move your money from one investment choice to another without charge, several times a year. So if you are worried about the possibility of a severe economic downturn, contact your fund and move your money into “cash”.  It won’t grow very fast, but it certainly won’t disappear.

You’re almost there …

4. Review those deductions.

There are some you can’t change (contributions tax and fixed fees for example) but other deductions, such as insurances and variable fees, can be substantially affected by your choices.

Fixed Fees

You will see a ‘fixed fee’ which is a management cost charged at the same rate to each account holder. This fee is often left out when superannuation funds publish their results because it cant be converted to a percentage. For example, a monthly fee of $30 will be 3.6% per annum of an account of $10,000, whereas the same fee charged on an account of $100,000 will be only .36% of that account.

Variable Fees

Variable fees relate to the type of investment and will be higher where more administration is required. If you choose an investment option that requires frequent buying and selling of assets (like shares) it will require more hands-on management and fees will be higher. It’s also likely to be higher risk and would be expected to have higher returns.

Total Fees

Add together any fixed fees and variable fees and divide by your account balance. You’re looking for a figure between 1% and 2%.  If your balance is low ($20,000 or less) the figure will be higher. If you’re in a fund with fixed fees, they’re usually in the $hundreds per annum.

Industry funds are generally not geared towards profit, meaning they have lower fees. The flip-side is, the funds that ARE set up to make profits do so by increasing your account balance. If your account goes up as a result of better returns, it’s a win for you!

Keep an eye out for one-off charges like ‘advice’ and ‘exit’ fees. These relate to events that occurred during the reporting period.

Since increased competition has bought fees into focus many have been scaled down and ‘switch’ and ‘exit’ fees are now rarely charged.

Insurance

Paying insurance out of your superannuation account is quite common and often makes good sense. You should make a point to review this regularly to ensure it suits your current circumstances.

Do the types of insurance you have cover what you need covered? If your family situation has changed maybe you need to adjust levels of life or TPD insurance? If your employment has changed, perhaps you need to change your income protection policy? Get a quote from a different insurer and check the amounts you are paying seem reasonable.

Consider the effect of having these policy payments coming out of your superannuation fund. Remember these are reducing the amount you have in your balance.  If you have a small balance do you really want it used up on insurance?  Especially if you are off work for some un-insured reason and there is little or nothing going into your account.

5. Check your balance.

There are new rules governing inactive funds of $6,000 or less. These rules allow your Superannuation Fund to cancel your insurances and transfer your balance to the ATO for management.

If your balance is under $10,000 make sure you understand the implications and don’t get an unexpected surprise. Your fund should give you adequate warning, but you’ll need to make sure they have your current contact details. Probably best to give them a call if you’re unsure.

Your Turn

Hopefully these 5 simple steps have helped you understand and review your superannuation statement. We encourage you to take an interest in the management of your super and to ensure you’re on track for a comfortable retirement.

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We’re jumping in because:

  • it affects Fran’s own situation.
  • it’s entwined so intricately with superannuation growth, the subject of a lot of our education.

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Very short answer: yes.
 
Longer answer: if you stop contributing, and you’re paying fees and premiums, it can happen. Do that for over a decade, and you could have next-to-nothing left.
 
My statements come from a real-life example, not a hypothetical one.

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I recently had an interesting (and somewhat frustrating) discussion with a financial planner about making extra superannuation contributions. In general, she thought it was a good idea. In general, I was against it. We both agreed that specific situations warranted different approaches, but in my specific case – a mid 30’s woman – she thought extra contributions were wise. I disagreed.

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How much money do I need to retire?

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The KPI targets and the contents of the not-to-do lists vary, but the concept is essentially the same everywhere. We have too many targets and too much to do, so we lose sight of the important stuff. It’s part of the human condition.

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