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Ask an Adviser - Is a Self Managed Super Fund Right For Me?

Q&A Superannuation, Savings & Investments 24 Aug 2017

I'm 45 with $170,000 in super. Should I get an SMSF? I've heard that they are better because you don't have to pay fees to one of the big institutions and you have more flexibility in terms of where your money is invested. But with the new super rules that keep being talked about in the news, what is best? Industry, Retail or SMSF? And what are my tax breaks now? Are there any anymore changes coming? Very confused...

3 Answers

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2

Dear Scott,

I absolutely agree that taking a proactive approach to managing your superannuation is highly beneficial but this does not necessarily mean a Self Managed Super Fund (SMSF) is required.

SMSF’s: Myth Busting

There are a number of misconceptions regarding SMSF’s and it is very important to truly understand the responsibilities involved and to have a clear rationale before making the decision to setup an SMSF.

Firstly, let’s address the title ‘Self Managed Super Fund’

What this actually means is that you have the responsibility- as an SMSF trustee- of running the fund and a responsibility to the members of the fund. You are responsible for the administration, compliance (including annual returns and audit requirements) and investment strategy of the fund. In practice, this means you would generally need to work with an accountant, an independent auditor and a financial adviser (as well as your time) to effectively administer the fund. Hardly Self Managed!

Now let’s address whether an SMSF is ‘better’ in terms of flexibility and fees.

Flexibility and Fees

Whilst there are certainly benefits to SMSFs for some individuals with specific circumstances such as complex estate planning requirements or particular business operators that may benefit from utilising an SMSF for specific rules regarding business real property, for most of the rest of us it is possible to outsource the above mentioned headaches to a professional Trustee for a small fee.

There are relatively high ‘fixed costs’ to setup and run an SMSF so a reasonable balance is required to justify the expense. Many suggest the minimum balance needs to be at least $200,000-$300,000. I would add to this that you need a specific reason for requiring an SMSF to justify the time and expense.

The core purpose (by law) of your superannuation savings is to provide retirement benefits to the fund members. I believe therefore that time and money is better invested focussing on your retirement and investment strategy rather than administration.

Industry, Retail or SMSF?

You opened your question referring to fees and flexibility. Whilst many industry funds claim low fees (beware the hidden costs!), they generally offer ‘one-size-fits-all’ investment options and do not provide the level of control or flexibility.

An SMSF can provide flexibility but this is only beneficial if you have a clear need for it (and use it).The additional access that an SMSF provides in terms of investment options is in regard to ‘real’ assets such as direct property and to a lesser extent art and collectibles.

Financial advisers are able to utilise superannuation services that provide access to literally thousands of wholesale investment options from which they can devise a portfolio focussed on building your retirement wealth. These technically fall under the ‘Retail’ banner but I caution again to look for the separation of the administration functions from the investment options when it comes to retail solutions.

Ultimately, an adviser can work with you to assess the various options to help to find the right solution for you.

Tax

It is important to understand that the tax environment is the same regardless of whether your super is within an SMSF or an industry or retail fund. The way your money is administered, however, can have a real impact on the overall tax position.

More changes…?

Yes! The one constant is that you can expect is that changes will continue to be applied to the super environment (there are a number of announcements from the last budget that are still being debated in parliament). As well as legislative changes, the investment environment is constantly changing and your personal circumstances (including age) can impact on your superannuation strategy. For this reason, there is no ‘set and forget’ solution when it comes to your super.Yosha Steeghs

General Advice Disclaimer
Note: This advice is of a general nature only and does not take into account your personal situation and all of your objectives, your financial situation or needs. Before making any decisions you should seek advice from a professional, qualified financial adviser.
Yosha Steeghs
Yosha Steeghs Yes Wealth (Professional Wealth Services)

Adv Rating 92% Cust Rating 100% Reviews 8

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Vote Answer

1

Hi Scott,

Firstly, it’s fantastic that you’re thinking about how you can get the most from your super, and at an age where you have time, before retirement, to make a difference.  Secondly, you’re not alone in being confused about super!

We believe there are 3 key decisions people need to make in relation to their super:

  1. How much will I contribute to super and how frequently?
  2. What will my super be invested in?
  3. Which super fund should I choose?

Contributions have a very real impact on the performance of your fund. You can choose to make contributions that might reduce your tax by using a strategy called salary sacrifice. Or you can put money in from your savings.  Either way you need to get the magic of compound interest working in your favour.   If you’re looking to make tax deductible contributions (like salary sacrifice) then you have a limit of $25,000 each year.  This limit includes the contributions that your employer makes on your behalf, usually 9.5% of your salary.

Have you made an active choice on how your super is invested? If not, you’re not alone. The majority of people rely on their employer to select a default fund. If you take this approach, you may end up having 40 per cent of your super invested in cash and bonds which may not be the most appropriate strategy for you. Given super is a long term investment it makes sense to consider a decent weighting to more aggressive investments.

There are a number of things you should consider when assessing the right super fund for you. Super is a very competitive environment, so in the main, fees on super funds are coming down.  If you’ve been with the one fund for a long time, or you’re in a default fund, it is worth comparing the fees you’re paying with the current market.  The cheapest is not necessarily the best as you want to make sure you have access to quality investments, insurance, reporting and administration.  So, value is key.

SMSF’s can give you greater flexibility in investment and the operation of the fund, amongst other benefits.  With your fund balance of $170,000 it is unlikely to be cheaper to run a SMSF than using a retail or industry fund.  And, you have to do more work and take on more responsibility with an SMSF.  If you’re in a position to combine your super resources with another (such as a spouse or close relative) you could bring the cost of the SMSF down.  Many retail and industry funds allow you access to a very broad range of investments these days, in fact there is very little you can’t access via one of these funds.  Direct property being the key exception. We see an SMSF as working best when you have a specific strategy in mind that you can’t do via an industry or retail fund.

Scott, Super success begins with you. It’s your choice who administers your super, how your funds are invested, as well as how much money you are putting aside. We would always recommend talking to an experienced financial adviser to help you make the right decision for you.

General Advice Disclaimer
Note: This advice is of a general nature only and does not take into account your personal situation and all of your objectives, your financial situation or needs. Before making any decisions you should seek advice from a professional, qualified financial adviser.
Jeff Thurecht
Jeff Thurecht Evalesco Financial Services Pty Ltd

Adv Rating 84% Cust Rating 0% Reviews 0

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Hi Scott.  Thank you for your question.  Let me start by saying you are not alone. The world of superannuation is complex, it undergoes constant change and every individual and their personal circumstance is different.

The one question I get asked all the time about SMSF’s is what balance do I need to start?  Well… ASIC have come out recently and said that whilst they don’t mandate a starting position they suggest $200,000 as a minimum balance to ensure the most cost effective outcome in order to meet a client’s best interests.

Personally, I believe it all comes down to a multiple of variables when calculating the cost effectiveness of an SMSF for an individual situation. Here are some of the most important questions you need to ask yourself:

  • Why do you want an SMSF?
  • How does it stack up against your current fund or a different retail fund? 
  • What are the investments you wish to hold in the fund?
  • Do you have the skills to meet and maintain the obligations of running a fund? 
  • Are you able to undertake the administration work and investment management to make it more cost effective or will you outsource?

I advise my clients to not only compare price but to project performance outcomes over multiple investment scenarios. This step is vital in providing you with the data you need to make an informed decision.

If you have planned a robust investment strategy that can only be achieved through an SMSF then one should be considered. Should you wish to invest in direct equities, managed funds, term deposits and cash, then there are fantastic retail funds available that offer competitive fees and service along with the investment choice that you may be looking for. 

In either scenario, to make this decision you need to be informed, because what works for one person may not work for you. 

Industry, retail and SMSF funds are all subject to the same tax and legal requirements.  The current superannuation caps are:

  • Superannuation Guarantee (SG) cap is $25,000 p.a.  Should your SG fall short of this amount you may elect to salary sacrifice up to this cap to boost super and to minimise taxable income.  You will need to check with your employer to ensure they allow salary sacrifice.
  • The non-Concessional Superannuation cap is $100,000 p.a. You may elect to use the bring forward rule and contribute $300,000.  This means that no further non concessional contributions can be made in that 3-year time period.  Non-Concessional Caps are not tax deductible and monies are not taxed when received into super.

The main difference between industry and retail funds versus SMSF is that through an SMSF you are personally liable for ALL the decisions made by the fund even if you get assistance from a professional along the way or even if it’s one of the other members.

In answer to your question about further changes that are coming... There is no denying superannuation was hit hard in 2016 budget with most changes now coming into play.  Thankfully the 2017 budget saw super predominately left alone which following the list of changes from the year prior it was a welcome relief.  Whilst we don’t know what the 2018 budget holds what I will say is that superannuation is still the most tax effective investment savings vehicle today. 

So in answer to your question, should you embark on an SMSF strategy?  My answer is maybe.

General Advice Disclaimer
Note: This advice is of a general nature only and does not take into account your personal situation and all of your objectives, your financial situation or needs. Before making any decisions you should seek advice from a professional, qualified financial adviser.
Sacha Burchgart
Sacha Burchgart Burcheart

Adv Rating 89% Cust Rating 99.58% Reviews 15

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