So, Self Managed Superannuation Funds or SMSFs or I have even referred to them as Smurfs (spoken, not written). They have become pretty popular over the past few years and I can't understand why. Well, I know why, but I think those reasons are a little bit misguided on the whole.
So many people are so disengaged from superannuation they haven't changed their super fund, insurances within the super fund, investment option or even consolidated their super funds when they've ended up with more than one, and now they want to take on the much more onerous task of managing a SMSF.
The reason people want a SMSF is because they believe it will result in a greater financial outcomes for them and that belief has mostly come about through the limited recourse borrowing rules that allows you to borrow to purchase investments. Whilst this is often used to buy property, it can also be used to buy shares or managed funds. However, the stats show that this is by far the minority. According to the ATO SMSF statistics from June 2013, limited recourse borrowing arrangements made up a staggering 0.5% of all SMSF assets. The biggest holdings are 31.3% listed shares and 30.5% cash. What? Cash and listed shares, you can get them in retail super funds and some industry funds.
So, what about that magic balance when it is a good time to get a SMSF. Isn't it better when my super gets to $200,000? Well, if you are paying an administration fee for super that is 0.50% and the annual running cost of the SMSF is $1,000. Then sure. At $200,000 they are the same, then as the balance grows you are better off with the SMSF. And in some instances you may be willing to pay an increased administration fee in the short term to access the benefits of a SMSF. But what ends up happening a lot of the time is that you get the SMSF then go invest in an investment product where there administration fee for that product is roughly equal to the administration fee of the super fund you just got out of. Or even worse, it all gets too hard, the money goes in cash and stays there like the 30.5% of all SMSF assets. That would have really hurt over the past 5 years where diversified investments have returned about 10% and cash about 3%.
So, if you already have a SMSF, what is it invested in? Are you making best use of the fund or is it sitting in cash? Have you reviewed the investments? Make good use of it or wind it up. The accountant doing the fund returns each year isn't going to suggest you wind it up.
If you are thinking about starting a SMSF, have you thought about all the detail involved? Trustees? Are you going to have individual trustees or corporate trustees. As Noel Whittaker said recently "I can't see any reason to have individual trustees", well Noel, there is 1 reason and it is the reason why so many people choose individual trustees and that is cost. Do you know what happens to a SMSF if you have 2 people as individual trustees or directors of a corporate trustee and one dies or one because incapacitated? If you have a corporate trustee, who is going to be the shareholders and secretary? And make sure you're not just getting a SMSF, the SMSF should just be a tool for the investment strategy for you.
One of the big downsides to a SMSF is that it is almost impossible to make use of the anti detriment rules, so consider that carefully. I wrote about anti detriment in an earlier blog here
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