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.
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)