SMSFs: should I or shouldn’t I?
Sometimes you feel an overwhelming desire to wrest control of an aspect of your life that’s felt not quite right. You’ve been watching on, or maybe deeply involved, for years. Something has consistently annoyed you, or you’ve seen avoidable errors, or the decisions of others are affecting your life in a way you’re no longer willing to tolerate. It’s time to act. To do something. This could relate to any aspect of your life. But regulars will know I don’t do relationship, marriage, parenting, health or career advice. This is a finance column.
So, that feeling above could be about many things financial, including your budget, getting ahead financially, retirement, starting an investment plan, protecting yourself, or buying a home.
For countless Australians each year, that focus falls on superannuation. And the “selfmanaged super fund” thought bubble pops into a few heads.
The frustration with super could be for any number of reasons: too many funds, returns are concerning, fees seem high, insurances aren’t right. It could be a combination or even all of them.
But the general feeling is: “I deserve better than this. I think I need to take control.”
There’s nothing wrong with that feeling. It’s likely to lead you to a better place. But with so many paths, which one will you take?
TAKING CONTROL OF YOUR SUPER
You can generally change the investment settings with your existing super fund to take higher or lower risk.
You can move super funds to access more suitable investment options. You might want a platform that allows picking very specific investments or shares.
The ultimate platform to control your super, however, is a SMSF.
Tens of thousands of Australians take up this “nuclear” option each year. There are more than 1.1 million SMSF members, as of June 30, up 43,000 on the previous year.
SMSFs take you from having everyone do everything for you to having all the responsibility yourself.
IS IT FOR ME?
SMSFs are potentially awesomely powerful beasts. Some types of investment, such as buying residential property, can only be done with a SMSF. But they are not for everyone.
It’s a bit like managing a small business. You are responsible for everything – the good and bad bits, the fun and annoying bits.
You can listen to advice from anywhere, but you make the ultimate call.
When you join a SMSF, you take on two roles. The first is being a member, but the second is as a trustee. And that comes with significant legal responsibilities.
As trustee, you become the manager responsible for the outcomes. This does not mean you need to do everything. You can, and will probably need to, bring in professionals. You must exercise that power to hire and fire the help.
Those professionals might include accountants, auditors, financial advisers, lawyers and property experts.
Tens of thousands of Australians take up this “nuclear” option each year. There are more than 1. 1 million SMSF members, as of June 30, up 43,000 on the previous year
OKAY, HOW MUCH?
Well, that’s actually two separate questions. How much should you have to start a SMSF? And how much does it cost to run one?
When it comes to how much you need to start a SMSF, opinions vary. Some say as least $250,000.
Others say $1m. To be clear, those numbers are a total starting balance. That might include you and your partner. SMSFs are limited to four people. The real answer to that question comes down to what you want to do in your SMSF and how much work you’re willing to do yourself.
If you’re intent on doing almost everything yourself, you can potentially start with a lower balance. But, if what you’re really interested in is your own investments, there are plenty of existing superannuation platforms that allow you to do that, cheaper with fewer headaches.
There comes a point when your combined super balance will see a SMSF make sense from a pure cost perspective, including full service from a financial adviser. (In my opinion, that can be from around $700,000.)
At whatever that point is, which will vary, the total cost of running the fund can be less than your existing funds.
There are other benefits that can help provide savings, including better tax outcomes.
Now, to the cost of running a SMSF. If you’re going to do the lot yourself, the minimum can be close to about $1500-$2000, including accounting/audit and government fees. On a $250,000 balance, that’s roughly 0.7 per cent, which will be cheaper than most super funds.
The fees might not change much on a balance of $500,000. The fee then would have dropped to just 0.35 per cent. But this involves doing all the research, investment decisions
and taking on all responsibilities. For people with considerable investment and management experience, they might enjoy doing that anyway. That could be a great outcome.
For those who don’t, it’s a headache you don’t need to bring on yourself and should avoid.
SMSFs with larger balances can bring in professionals and still see overall costs reduce. You’ll need to find the right professional and understand the fee structure properly, as it will vary from adviser to adviser.
But they will become your investment and technical adviser, doing the research and giving you recommendations. Sometimes you’ll want to say no to a recommendation. And you should. You’re the boss. It’s your money.
SMSF PROPERTY INVESTOR
One of the things SMSFs can do that retail and industry funds can’t is invest in direct residential property.
They can even borrow to invest in property. This can be a major drawcard for those who are already investors in their own names and understand the risks and benefits.
And never more so than at the moment, when people are watching property, as an asset class, playing catch up for a lost 2020 and going on a stampede.
SMSFs can be a powerful vehicle for property investment. Properties can be negatively geared, though the tax rate is only 15 per cent, so the benefits aren’t as high.
One of the main benefits of buying property inside super is the tax at selling time.
If you don’t sell it until you turn on a pension in your super fund, you don’t pay any tax on the capital gain, no matter how big.
If you continue to hold it when the fund is in pension, there’s no tax to pay on the rental income.
But please note my diatribe from last week about property developers.
I’ve said for a decade that the single biggest threat to newbie or wannabe SMSF owners is a property developer. Avoid them, or else you could end up shifting all of your retirement savings to the developer to fund their retirement.
Do not open a SMSF on the suggestion of a property developer or from someone associated with them. Ever.
Don’t open a super fund to invest in property if you’ve never owned a property outside of super, or run a business.
SO YAY, OR NAY?
I can’t answer that one for you. It’s a very individual question with a very individual answer. Honestly, the advice I give most often is “no”.
I’ve sadly seen way too many SMSFs that should have never been opened. Poor choices by people who thought it would be a good idea. And, in some cases, poor advice from conflicted professionals more interested in charging fees than looking after a client’s best interest.
In years gone past, some people made the decision to start a SMSF after picking up their annual super statement and seeing a negative return. That’s not a good reason.
In some years, all super funds return a negative result because that’s the way investment markets went. And you (most likely) would have, too, even with your own SMSF.
That’s not going to happen this year, with returns likely to average close to 20 per cent.
Now, if you do want my advice on your career or relationships, that’s cool. That could be fun, so long as I can’t be held responsible for it.