To self-manage or not to, that is the question most ask themselves.
It generally starts with a discussion at a BBQ after you have settled in, discussed the recent news and caught up with the latest gossip with your friends. Now, we as Australians are not that forthcoming when it comes to talking about money. However after a few drinks and feeling relaxed at a social event the question normally comes up, do you have a self-managed super fund?
Or it could be someone bragging about the fact they run there own super fund and wouldn’t trust anyone else to manage or make decisions on their behalf. Or, the thought that if I am going to pay someone else to manage and lose my super I may as well do it myself.
You walk away from the social occasion asking yourself, should we start a self-managed super fund? After all, if your friends have one, you should get on the bandwagon, right?
What is right for one person does not necessarily make it right for the next.
My older son has a habit at times of following my youngest bad habits and it normally ends up in him making a bad decision. So, I always ask him this question, if he was to jump off a cliff would you follow? Most often than not the answer is no unless he is in a cheeky mood, he will answer yes just to get a reaction out of me.
Just because someone else is doing it does not necessarily mean that you should be starting one.
What should I be considering if thinking about starting a Self-Managed Super Fund?
- What is my main purpose for starting a Self Managed Super Fund?
I tend to think this is the most overlooked question, why do you need one? What is the main purpose of starting one and does it fit into your overall financial strategy? You don’t start a Self Managed Super Fund just for the sake of it, it is a complex structure and if managed incorrectly can cause you much-unwanted grief. In my view, you must have a good reason for starting one.
My view is it must fit into your overall strategy, that is, is it one of the strategies you need to employ to achieve or enhance your future lifestyle and goals. I find thinking about the end goal in mind and working back to see if such a structure fits into your overall strategy if a good way of justifying whether it is right for you or not.
2. What is the minimum I should have before starting one?
How long is a piece of string? There are varied opinions on how much you require before starting an SMSF, anything from $250,000 upwards. My view on this is it depends, it depends on a number of factors, the reason for starting one, investment strategy, starting balances, ongoing contributions and most importantly cost. It really depends on the circumstances, what works for one is not going to work for the other.
3. Are you going to manage it solely by yourself or outsource some aspects of the SMSF?
Are you planning on running the SMSF yourself? Now, even though the name of this structure is called a Self Managed Super Fund, given the complexity of these structures (to date there are around 1,000 pages of legislation that covers SMSF’s), rarely do most people complete all tasks required of an SMSF. The two main tasks are the administration of the fund (admin, tax & audit) and the management of the investments. The question to ask yourself, are you adequately qualified to complete any of these tasks? If not, you will need to consider engaging experts to assist with managing your SMSF.
It’s going to take time to complete all tasks if you are going to do it yourself, do you have the time? After all, it’s a trade-off, what could you be doing with your time that is more valuable to you, like spending time with family, working on a hobby or playing a sport…
4. What type of investments are you looking to invest into?
Sometimes one of the most underrated questions. If you have no idea what you are going to invest in, what’s the point? Are you looking to make investment decisions on your own or are you looking to engage a professional to help with your investment decisions? Are you going to go direct or use managed funds? Are you looking at investing in direct property?
A requirement of operating an SMSF is that you must have an investment strategy and that investment strategy must include insurance recommendations for the members. You can ultimately invest into what tickles your fancy, provided it meets the rules. Historically, SMSF’s have been geared towards Australia shares, I guess because we have a love affair with Austrailian companies and franking credits. However, this has been to the detriment of SMSF’s as they have missed out on generating returns from International investments. That is slowing changing.
Ensure you have a sound investment strategy built around what it is you are trying to achieve.
What are some of the myths when it comes to SMSF’s?
- Cash is King?
Many people start an SMSF, and I cannot tell the countless stories I have heard of high levels of cash being held or the fund being substantially held in cash. Unless you are requiring the money for something in the near term, holding high levels of cash is a sure fire way to making sure you lose money in the long term. For some they are comfortable with this but makes no real sense whatsoever given low inflation rates, your money, in reality, is going backwards.
Any money invested through super is likely to be in place for 10, 20 or even 30 plus years for some. This is what we call a long investment horizon. If invested in the right assets and without panicking, you will get the results you are looking for. As with any strategy we always ensure sufficient cash to manage any downturn in markets along with near-term capital expenses.
If you are interested in knowing more about investing, CLICK HERE for my recent post about managing through share market downturns. It some great points about how to allocate your money dependant on your age.
2. SMSF’s have more tax benefits…
I can’t tell you how many times I’ve seen this one, normally as part of an advert to sell you services of an SMSF. Admittedly there are some extra benefits that come with holding an SMSF, but for most, it’s the same as a normal super fund. They all are subject to the same rules:-
- 15% tax on employer and tax-deductible contributions
- 15% tax on income in the accumulation phase
- 0% tax on earnings in pension phase (when retired)
- 0% tax on capital gains in pension phase (when retired)
Yes, there is a little more flexibility with an SMSF, but the tax rules apply through all super fund structures.
3. Only SMSF’s allow investment in direct shares…
This is far from the truth it’s not funny anymore. Super providers have changed substantially over the years, nearly all now offer the ability to invest in direct shares except a number of industry and corporate super funds. You would need to look around or if you are working a professional, they will assist in finding a structure that would allow you to do this without opening an SMSF.
4. SMSF’s perform better…
There’s no conclusive evidence that an SMSF outperforms. It comes down to the individual investment allocation. I tend to think this focus is misdirected. Don’t get me wrong investment performance is important, but what’s more important is the achievement of financial goals for individuals, this is what really matters.
One question I like to ask people is “let’s say that you achieved every single one of your goals, ie you had enough money to live your ideal lifestyle, travel, help kids out, upgrade homes etc and you never outperformed the market, would you be happy with that? I have never to date had someone say no to that.
Another way of asking this is let’s say you outperformed the market every year but never achieved all your financial goals, would you be happy with that? Unlikely.
Sometimes I think due to the financial pornography out there, it forces us to focus on the wrong things.
5. SMSF’s are cheaper…
I think this one is up there when deciding to start an SMSF. There is no definitive answer to this. Obviously the larger the balance, yes it can be cheaper, but if it’s not performing or you are no managing it actively, it may not be cheaper. Given there are so many providers and options this is a difficult one to answer.
Looking at experience at around the $500,000 – $1,000,000 mark costs can be line ball between SMSF and other comparable options. Over the $1,000,000 mark, it becomes more compelling.
I think you will agree, it’s not an easy decision whether to start an SMSF. My advice to you if you are thinking about one is to consider and make sure if you are starting one, it’s for all the right reasons. Seek advice and do your research as they take time to set up and time to unwind and cost you a lot if you get it wrong.
Oh, yeah, you might have seen a lot of property spruikers around promoting property within an SMSF, try and avoid them and if you are considering property in an SMSF, seek professional advice first. I have seen too many people start this journey with the promise of riches and it never ends well.
You may have also heard that there is a royal commission going on at present. It’s highlighted the fact that even celebrity advisers have not had the clients best interests at heart. If you are speaking with an adviser that is recommending that you go into an SMSF, don’t be afraid of asking the questions.
One of the big issues was that the adviser in question who owned the business was going to make more money out of it. It was going to be administered by the firm (more income for them), the fund was going to be invested in their own investment product (more income for them) and they were able to charge more as they were managing more money (more income for them). As you can see this smells of conflict and profiteering. No different from what the banks were doing.
My view, the adviser fee should have been able to be substantiated whether an SMSF was recommended or not.
Why are you recommending an SMSF? It must put you in a better position.
Do you receive any extra income or incentive from recommending an SMSF?
Could I get the same result without starting an SMSF?
What’s the difference in cost between an SMSF and other super structures?
I hope that’s given you useful information that can assist you in making the right decision whether an SMSF is right for you.
If you want to have a chat about whether this is right for you feel free to give me a call and we can book a phone call.
If you feel someone would benefit from the information contained in this blog, do them a favor and feel free to send it on.
Make it a Great Life!
Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth
Mob: 0401 253 729
Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at April 2018. This is an online information blog. It does not imply an offering of securities.