When does it make sense to move your superannuation savings into a Self Managed Super Fund? Is not shifting to an SMSF a wasted opportunity? Who should have a self managed fund?
This week we’re going to get you answers to all these questions. So if you’ve ever wondered whether a Self Managed Super Fund is right for you, hopefully this week’s episode we’ll set you straight.
Let’s start by covering off the key foundations. Self Managed Super Funds are a legal structure set up to enable you to manage your own retirement savings. As with regular super funds, any money held within them is preserved until you are at least 60 years of age and retired. The intended end game is to produce income in retirement.
Self Managed Super Funds can have up to six members. Most commonly you have two spouses together in the same fund, though you might have their children as well. It’s worth noting that although a Self Managed Super Fund might have multiple people’s retirement savings held within it, each member of the fund has their particular balance recorded and tracked separately. At all times it is clear within the fund how much of the asset value relates to each member, even if those monies are combined into a single asset.
Self Managed Super Funds, commonly referred to via the acronym SMSF, cost around $3,000 to set up. They then need an annual tax return and audit done every year, which usually costs around $2,500.
Running a Self Managed Super Fund does mean taking on some important responsibilities. There are rules about how superannuation savings can be invested, and as the trustee or controller of your super fund, you are legally responsible for ensuring that these rules are followed.
Self Managed Super Funds tend to be disproportionately held by those operating businesses. This seems to be because business owners are already familiar with running a company, and so running an SMSF is not such a big leap. They also likely have a good accounting relationship, which is important in ensuring the fund is run in a compliant manner. It’s also the case that one of the predominant uses for an SMSF is only applicable to business owners, something we’ll discuss in a moment.
The ATO is the regulator of Self Managed Super Funds. In March this year they reported that there are currently 606,000 SMSF’s in Australia representing 1,136,000 members. Their report observed that 87% of SMSF members are aged 45 or older.
Growth in the number of Self Managed Super Funds in Australia has slowed in recent years. Interest in the space grew considerably during and after the GFC in 2008 and 2009. At the time share markets were having a dreadful run, and it was relatively new that Self Managed Super Funds were able to borrow to acquire residential property. So many SMSF’s were established by those looking to have their retirement savings in property instead of shares.
Some people also pursued Self Managed Super Funds as a way to be able to buy direct shares rather than funds. This could have been because they had an interest in the stock market and wanted to have that level of control, or because of the potential for cost savings by eliminating fund manager fees.
Common use cases today
Business owners using a Self Managed Super Fund to acquire a commercial property from which they operate, remains a valid use case for self managed super funds. Generally speaking, Self Managed Super Funds are prevented from doing any transactions with members of the fund, or related parties. However there is an exemption for commercial property. This means that a Self Managed Super Fund could buy a warehouse or office, which the business owner then leases from the super fund, paying rent at normal commercial rates.
This strategy is attractive to business owners because they have control over their premises and therefore can feel comfortable investing in fitting it out as required for their particular business needs.
The potential downside is that you were putting all of your eggs in one basket to some extent. If your business goes through a tough period, you might struggle to pay the rent, and then both your livelihood and your retirement savings are put in jeopardy.
Self Managed Super Funds are able to borrow for property purchases, which helps make commercial property acquisition viable. That said, loans aren’t easy to obtain, and often need to be sourced from specialist providers which can have high interest rates.
Another use case for a Self Managed Super Fund is for a person with a relatively large amount in super, who wishes to be quite hands on with the management of their money. They would go down the SMSF route in the expectation of cost savings as they take on the funds management and administration roles.
When SMSF’s are unlikely to make sense
Because an SMSF needs to have an annual tax return and audit completed each year, they are unlikely to be cost effective for retirement savings of less than $200,000. In fact, there are plenty that would argue that you really need a minimum of $500,000 to make a Self Managed Super Fund cost effective.
If your motivation for heading down this road is because you want to invest in ETF’s and direct shares, it’s almost certain that you can find an alternative to achieve this at a lower cost and with fewer headaches. Some industry funds now offer the ability to purchase these kind of investments, and the various Wrap facilities that exist provide great functionality in this space, even including the ability to purchase shares on overseas exchanges such as in the United states. These solutions will typically have lower costs when compared to running your own SMSF, but even more importantly, they don’t require you to take on all the risk associated with being the trustee of a Super fund and getting something wrong.
As I mentioned earlier, once upon a time the desire to invest in residential property was a key driver for Self Managed Super Fund establishment. Today, in almost all cases, this type of investment would be best done outside of the superannuation environment. None of the five major banks will lend to Self Managed Super Funds for residential property investment, meaning that you need to source any borrowings from a fringe player which invariably means higher interest rates. You will also be very limited in what work you can do on the property. Properties can be maintained, but they cannot be improved. Very often property investors will want to update the kitchen put on a patio, or make some sort of other improvements. Perhaps you even want to sub-divide the block. But improvements like these are specifically prohibited for Self Managed Super Fund properties where borrowings have been used to acquire the asset, which is the case in almost all cases.
There’s also the issue of a lack of diversification for your retirement savings. Because of the large expense associated with buying a single property, most people that went down the Self Managed Super Fund residential property path had the majority, if not all of their retirement savings, in a single property and relying on a single tenant. This is not smart at all when it comes to your retirement.
The other use case that arose a few years back was for those wishing to get their retirement savings into crypto. I’m sure you can figure out how that’s panned out.
Let’s return to those questions I asked at the start of the episode. Firstly, when does it make sense to shift to a Self Managed Super Fund? For most people never.
There’s no particular balance amount where the logic of an SMSF is undeniable. Establishing a Self Managed Fund should be on your radar if you are a business owner and looking for a way to acquire a commercial property from which to operate, or you are someone with a relatively large balance in retirement savings, who wishes to be very hands on. Of course it goes without saying that you also need to be sufficiently competent. Your role as trustee of the Super fund is an extremely important one. Making poor investment decisions resulting in you outliving your money would be a disastrous outcome.
Who should have a Self Managed Super Fund? An SMSF is suitable for someone who is good at bookkeeping and administration, has skill and experience in investing large sums of money, and has the time and inclination to manage their retirement savings. They would also need to have retirement savings comfortably in excess of $200,000 to make it cost effective.
I hope things are now clear in your mind with regards whether a Self Managed Super Fund has application for you. If you’ve got any questions, send me a message by replying to one of the GainingCHOICE emails.
Most people who already have a Self Managed Super Fund will tend to retain them, because they don’t want to trigger capital gains tax upon the disposal of assets. But from my experience here at the coalface, there aren’t many people setting up new Self Managed Super Funds these days. The significant improvements in investment administration, and reduction in fees that we’ve seen in the past decade has removed much of the need for an SMSF solution.
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