Why you don’t need a SMSF

Self managed superannuation funds (SMSF) are often sold to people on the basis of getting greater control. That’s rubbish! Every time I hear it I roll my eyes and sigh heavily.

An off the shelf fund gives you great control

When you are thinking of getting more control over your superannuation, what control are you seeking? Is it more control over investment decisions?

Well, you already have plenty of that control in most off the shelf (retail) funds. For over a decade you’ve been able to choose the investment option within your current fund. And for nearly five years you’ve even been able to choose the superannuation fund (account) itself.

Are you seeking control over the money so you can spend it on yourself now? Think again – that’s technically illegal and scrutinised by the ATO.

What you can access and do in an off the shelf (retail) superannuation fund

  • Access an investment menu that includes hundreds of different managed funds from most investment sectors
  • Directly buy the top 200 (even 300) shares listed on the Australian Stock Exchange (ASX)
  • Invest in managed funds that include internal gearing
  • Buy some derivatives, such as some types of options and warrants

If you want all of those features you’ll pay a higher administration fee, but it’ll still probably be less than a SMSF would cost you.

If you don’t want any of those features you can find really low cost funds off the shelf (retail) that still give you control. The retail superannuation product market is so diverse you can probably find a product to suit your needs whilst also being value for money.

Do you really want to DIY your super?

Self managed superannuation funds may also often be known as DIY Super, which sounds attractive. But DIY is dangerous when you don’t know what you are doing.

Big penalties for non-compliance

Each member of a SMSF is also a trustee, which involves a lot of responsibility.

The SIS Act (Superannuation Industry Supervision Act) is huge and as trustee of your SMSF you are legally obliged to understand it and comply with it. If you don’t comply you could be stripped of your concessional tax status and pay the top tax rate. (i.e. no more 15% tax rate.) Ouch!

You can also be personally subject to a range of civil and criminal penalties for non-compliance.

Yes, you can outsource some of that compliance to a specialist financial adviser plus a compliance firm. But that costs money.

They’re costly

You also need to pay for annual financial accounts and audits. More money.

In a SMSF the costs can only be spread across four members, not thousands as with a retail superannuation fund. So your administration, investment and transaction costs can quickly add up to higher in percentage terms than in an off the shelf product. That’s why it’s best to wait until you have hundreds of thousands of dollars in superannuation before considering self managed superannuation.

When you may need a SMSF

There are some types of assets that retail superannuation funds generally don’t enable you to hold. If (big if) you need to hold these assets in superannuation then a SMSF may be appropriate for you. These assets include:

  • direct property
  • private business
  • collectibles (for investment only – no personal use allowed. And a recent announcement suggested these ‘exotic’ assets be banned.)
  • other direct investment assets. (e.g. that gold bar you just bought from the Perth Mint.)

In addition technically you can now ‘directly’ borrow to buy investment assets within superannuation. For example you can borrow to buy an investment property. If you want to implement that strategy you will need a SMSF (plus a nice sized deposit and good cash flow from contributions.)

Who definitely should NOT consider a SMSF

If you habitually ignore your superannuation, as evidenced by barely reading your annual statement, then a SMSF is not right for you.

Similarly if you don’t understand how superannuation works then don’t go near DIY Super. This may sound harsh, but if you have not understood this article then you’re probably not yet ready for a SMSF.

In summary the reasons a SMSF is not appropriate for most people include

  • you can get the desired level of control from a retail fund
  • you can access the desired type of investments from a retail fund
  • you’re not interested enough to learn to fulfil the trustee’s obligations
  • you want to minimise your costs
  • you don’t currently have a high enough balance

What do you think? Anything I’ve overlooked? Please share in the comments below (you can be anonymous)

Author: Matt Hern

Certified Financial Planner professional, Matt Hern has three times been awarded as one of Australia's Top 50 Financial Planners by The Australian Financial Review Smart Investor. He is passionate about guiding you on the right financial choices to achieve what you really want. Matt Hern is an Authorised Representative of Charter Financial Planning Limited AFSL 234665. All information is general advice only.

18 thoughts on “Why you don’t need a SMSF”

  1. Thanks Matt for this balanced appraisal. Its a good summary of the pittfalls that many unsuspecting Super clients are dragged in to usually by the friendly accountant.

    The Henry Report may go part way to aleviate this. I agree there is plenty of retail offerings in the market place to to keep confusion out of the Super excercise and help simplify investing for one’s retirement.

  2. Not sure i agree it’s balanced when you start the article with “why you DON’T need a SMSF”. Whilst i agree there are pitfalls and some funds permit you to choose your specific investments, having an SMSF provides FAR greater control. Name me one fund manager whom I can ring in the middle of the night to get my exact portfolio value, calculate the gains and losses including CGT and instruct them to sell / buy shares but only if the trading opens at a certain price. There is far more control in being able to immediately place a buy or sell order directly with the broker and see it being filled within two minutes than there is sending an email or fax to a fund manager who may or may not be staring at their email / fax machine and who may or may not have a coffee break before placing my order. On top of that, the fund manager then charges me to key the exact same things I can key myself plus I have to pay his fees regardless of whether he makes me any money! I have been running my own SMSF for five years now and can assure you, if I can do it anyone can. I don’t have any accountancy experience, I’m not a financial advisor or even a basic bank teller; in fact, I have trouble working out all the buttons on my TV remote control. But with a bit of patience, it is relatively easy to read the ATO and other website’s publications and run your own super. I think you do the average person a great disservice by stating they DON’T need an SMSF – perhaps if you had written “MAY NOT NEED”, I would have more respect for your opinion.

    1. Hi Kat and thanks for sharing your experience working with a SMSF.

      I agree that a SMSF can provide far greater control than an off the shelf fund. However my point is that the vast majority of Australians don’t need that very high level of control. Most Australians receive more than adequate control from a retail fund.

      Regarding your challenge – have you ever heard of “wrap” accounts. They link with many of the popular online share trading providers with all trades settled from the balance in your superannuation account. So you can in fact enter a trade any time you wish. Plus the “wrap” accounts provide very comprehensive online reporting, including CGT, that you can access 24/7 from the comfort of your home. Almost all the big name financial services companies have a super wrap.

      The title of the article may have been provocative but I hope the article was in fact balanced by including the circumstance when a SMSF may be appropriate. I presume you assessed your needs to fit within the circumstance that an SMSF is appropriate.

      However for most Australians an SMSF is overkill.

  3. Matt I found your article an interesting read but Im afraid that I have to agree with Kat for much the same reasons. Ive had an SMSF for approx 5 years and after being regularly done over by the existing funds which handled my workplace super before retirement I can honestly say the SMSF route has proved more beneficial to me.
    1.Access is easier,
    2 If you get a good accountant to organise the necessary compliance audits it is much more reasonable from a cost point of view. Ive had very fancy companies doing the audits initially (mainly due to being the new kid on the block) as a safeguard but it wasnt good value for money and caused me a lot of extra unnecessary work. They forgot that I was the customer and assumed that I worked for them despite giving them very detailed account information and paperwork. Not a good outcome Im afraid.
    There are good people out there to do compliance auditing so I would suggest that people check them out on a regular basis to keep the situation competitive.
    Overall SMSF has been a good experience for me despite some of the pitfallsand a bit of a learning curve along the way.
    The Henry report may change this a little but that remains to be seen.

  4. It does not surprise me that existing users of self managed superannuation may express disagreement with my article.

    Please remember I said a SMSF isn’t appropriate for MOST Australians. I didn’t say it isn’t appropriate for anyone. In fact I even listed when it may be appropriate for a minority of people.

    The positive experience of the minority for whom a SMSF may be suitable does not mean such specialist structures should be used by the majority, let alone all Australians.

    Your personal positive experience with any investment type is an interesting anecdote but it is far from a reasonable basis on which to recommend such an investment to a broad range of people. (That doesn’t seem to stop most taxi drivers I’ve traveled with.)

    I challenge any existing user of self managed superannuation to post a robust case for why MOST Australians should use a SMSF instead of an off the shelf fund.

  5. Hmmm let me guess … Kat’s a teacher and Ken’s an engineer?

    There’s also the dangers of uneducated members determining their own asset allocation and selecting investments. If you need to ring up in the middle of the night to check the balance or adjust your investments then perhaps you are worrying too much.

    On the other hand direct property can be a great reason for SMSFs.

    Too often I’ve seen SMSF’s offered as a solution only to increase the Accountants income.

  6. As a representative of a wrap-account provider (that is not owned or controlled by a bank), I can confirm that we have a number of SMSF clients who happily use the investment version of our product to manage part or all of their SMSF investment portfolio. Our online functionality makes it easier for investors to choose and manage their investments (including share trading) and it is available 24 hours a day. Our consolidated tax reporting also keeps the accountants happy at the end of each financial year.

    On the topic of investment choice, we offer over 250 managed funds across numerous asset classes as well as ASX-listed securities (including ETF options) through our Direct Share Choice option.

    On the topic of fees, our product has a capped admin fee for balances over $500,000. And if you were to combine this with our fee aggregation facility (i.e. linking family accounts), you will not collectively pay more than this maximum fee. The maximum admin fee on our product is $3,500 p.a. for clients wanting access to managed funds and direct shares.

    Admittedly we do not offer access to illiquid assets such as unlisted or business real property, but for the majority of investors, access to direct shares and managed funds is sufficient to more than achieve their retirement goals (with the right advice). So I tend to agree with Matt on his article based on what is appropriate for the MAJORITY of investors.

    I guess my main point is that retail super funds are not out to bleed their members dry and we offer a great deal of investment choice and online flexibility.

    As a final thought, if you MUST have a SMSF but it is not desireable or possible for you to be the trustee of your own fund, it may be worth considering a small APRA fund (SAF). Typically it has all the makings of an SMSF (including the ability to add business real property to your portfolio) but the trustee responsibility is borne by a professional corporate trustee. SAFs may be suitable for investors who feel that they do not fully understand the responsibilities of being a trustee or cannot be a trustee due to bankruptcy or non-residency for example.

    Thanks for your article Matt. There is a lot of hype about the virtues of SMSFs and it is good to stimulate some debate.

  7. Hi Matt. Enjoyed Your article. Could you please give me an idea where to get an answer to my problem? I’m retired 62, have a SMSF costing me well over $3000 in accountancy/admin fees, plus the hassle of preparing info each year. I only invest in TDs and online share trading. My thought is to close out the SFSF and split the funds into wife(57yo ret.) and my names as simple personal tax using eTax. How do I work out the break-even investment return amount at which we would have to pay more than $3000 combined personal tax as two retired investors?
    Any help would be appreciated. Thanks.

    1. Hi Charles. The direct answer to your question is that when you have strategic issues like that on your mind then the right professional to guide you is an experienced financial Planner (such as a Certified Financial Planner). There are quite a few overlapping issues raised by your few brief sentences. Pay for professional guidance and rest your mind at ease.

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  9. Given the performance of most active funds, would it be that hard for a SMSF to perform better? A term deposit or government bonds seem like they would have performed better over 10 years….

    From APRA:

    “In the ten years to 30 June 2010, the average ROR for large funds was 3.3 per cent per annum. Public sector funds recorded an ROR of 4.2 per cent per annum, corporate funds 3.9 per cent per annum, industry funds 3.9 per cent per annum and retail funds recorded 2.5 per cent per annum.”

    1. Karl, as I mentioned in my reply to your comment on another article those APRA stats are very misleading.

      Your comments makes me suspect that you, like most people, are unclear about the structure of superannuation.
      A SMSF is a style of bucket. The contents of the bucket determine the performance, not the style of bucket.
      You can invest in index funds within SMSFs and other off-the-shelf funds (retail and corporate). There are loads of very low cost retail superannuation accounts that enable you to choose to invest your balance in index funds. In fact that is what I most often suggest to clients who are just starting out in improving their financial competence and confidence.

  10. I understand re the buckets.

    I guess what I was trying to get at, is if you want to go with cash and index funds, then is it that hard to do a SMSF? while these options are available in superfunds, you may be able to do it youself just as easily and possibly with lower fees (ie Ubank and vanguard)…

    I understand that there are SMSF support structures out there that can audit etc a SMSF for around $700 per year… So depending on your funds, that doesn’t necessarily equate to significant costs (ie to warrant someone needing a $1,000,000 before setting up a SMSF).

    I agree with you, re superfunds offering a fast variety of products and can manage for very low fees and probably mean that a SMSF isn’t necessary. But I think that SMSF isn’t necessarily that hard or expensive…. It is an interesting and complicated debate and I guess depends on what people want to achieve.

  11. Thanks for the interesting article. Any return must clearly have costs deducted from it to ensure you see the real return. I am curious though. I attended a seminar that sold the benefits of SMSF in buying highly selective property. It indicated that the SMSF could borrow from the bank, have the loan repaid by the fixed super contributions paid by the employer, the rental from the tenant and any tax benefits received through gearing. It certainly seemed to make lots of sense, as most Australians turn to property as their most favored investment and the constant state of turmoil within the external economic market. Seeing the costs to run the fund were deductible anyway, providing the property choice was highly selective & appropriate it seemed to make sense. What am I missing? I also assume that MOST (but not all) financial planners don’t like SMSF because it erodes their income streams (sorry for being so blunt) but I always look at the ‘intent’ behind any advice to determine if their is any underlying issues. Thoughts?

    1. Hi David. SMSFs don’t erode financial planners income streams. In fact a SMSF trustee probably needs to invest more time and $ in getting great advice than a client with an off-the-shelf retail superannuation fund. An unethical adviser therefore has an incentive to recommend an SMSF over a retail fund. Fortunately the vast majority of advisers are very ethical professionals who put their client’s interests first.

      Given the above, have you wondered why accountants are often proponents of SMSFs? The cynic would suggest it is because they boost their annual tax and auditing fees.

      The strategy you described is popularly promoted by people who can benefit from the property transaction, the loan origination and the ongoing compliance of the SMSF.

      Before considering such a strategy you have to answer “yes” to the following strategic questions:
      – Is investing in direct property the right asset type for me right now, so that I can achieve my goals?
      – Is borrowing money to buy that asset the appropriate funding strategy for me right now?
      – Is owning the asset withing the entity structure of superannuation right for me right now?

      You then need to have the expertise to select the specific asset (in this case a direct property) where the expected return will exceed the extra costs involved from having the SMSF, the lawyers fees for the contracts, and the costs of the bare trust in which the property is owned. Costs may be deductible but they are still costs that eat into your profit.

      David, you asked “what am I missing?” I suspect you’re probably missing the overall life and financial view, and the plan. Looking at investments in isolation of an over-arching plan can lead to making choices that end up causing you to not have enough money for other important things in life.

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