I have been working with Self-Managed Super Funds for over 25 years. For that reason, the industry, the legislation and the terminology all seem easy and simple to understand. I can be quite biased about SMSF’s and do not understand why more Australians are not using this vehicle to steer themselves towards retirement. When I do get to speak with Australians that have their super in Industry or Retail funds, it strikes me that the barriers that they have to learning more about SMSF’s are based on misconceptions. With the Licencing requirements as they are, this can be quite a barrier to overcome as an industry. As Chartered Accountants we cannot tell someone that an SMSF is right for them and the Licenced Advisers that can tell them, may never be engaged. . There is a large group of Australians that are employed, are paying off their house, putting the kids through school and their only “investment” is via their superannuation. It is this group that find the concept of having an SMSF complex and too hard because they need to find out for themselves if it is right for them and much of the mainstream content is biased towards Industry funds and perpetuates common misconceptions.
The number one concern we hear from Australians is that they do not have enough superannuation to have their own Self-Managed Super Fund. What they think they need sits somewhere between $250,000 and $500,000. The argument for this superannuation balance is usually that the cost to run an SMSF as a percentage of your balance is too high to be viable. I will cover why the basis for this misses the mark below but when it comes to how much you need in super to have your own SMSF, there is more than how much you start with to consider:
- SMSF’s offer you greater control of your super. Rather than ticking one of three boxes, you have great flexibility to be able to grow your balance
- As a Trustee of an SMSF it forces you to engage with your super more. You not only have more control, but you take more interest in your super. Better engagement equals better outcome. It is like compound interest, 1% extra effort compounds over time.
- In certain circumstance, an SMSF can borrow. This means that with a lower balance in your SMSF you could borrow to purchase an SMSF such as a property and the asset value generating income in your SMSF could potentially be 50 – 60% greater.
- There are certain types of investments that you can only access with an SMSF so the opportunity for diversification is greater, for example, unlisted shares.
- Remember your super balance is not just the amount in your account. Under certain circumstances, you or your dependants may also be able to access insurance proceeds.
Unfortunately, this super balance misconception is restricting many Australians’ investigating, either themselves or through a Licenced Financial Adviser, whether an SMSF is appropriate for them.
This goes hand in hand with the minimum balance misconception because how much an SMSF costs to set up and run is what drives how much you need to have one. The Australian Securities and Investment Commission (ASIC) advice to the Advisers they licence is that advice to establishment an SMSF must put the individual in a better position than they would have been if they kept their super where it is. This means that the return over the life of the investment, through to retirement, need to be the bigger. The problem is that ASIC have also greatly overestimated the cost of having an SMSF and therefore the “better off” approach is flawed. ASIC estimates that an SMSF costs, on average, between $15,000 and $18,000. More recently the Self-Managed Super Fund Association’s research debunked this estimate and reduced this amount to between $3,000 and $4,000 to effectively run an SMSF each year. What I do know is that when someone is researching whether an SMSF is right for them, and they ask me how much they cost to run they are really surprised as they had disregarded an SMSF as an option in the past because they had heard they were expensive to run.
Contributions and Super Choice
“I wasn’t aware that I could contribute to an SMSF”. I hear this more often than I should. Super Choice has been around since 2006 but there is still the misconception that Super Choice means choosing between the employer’s default fund (usually an Industry Fund) and a Retail Super Fund that their Bank Manager told them about. Perhaps this is just a symptom of the barriers to getting accurate information about SMSF’s or the SMSF Industry’s focus on control of investments and overlooking the simple things when it comes to how an SMSF works. The message here is simple, your Employer can contribute your Superannuation Guarantee into an SMSF using the same process they would do to contribute to an Industry or Retail Fund.
Another misconception that I hear often is – “I can’t have my own SMSF because I get Life Insurance with my Industry Fund”. Like super choice, the misconception is that life insurance is something that is only offered in Industry and Retail funds. The reality is that you can have life insurance in any or all of the super funds you hold
So, you can hold insurance in your SMSF, and the process is no different to getting insurance outside of Super.
You need to do everything yourself
Using “DIY” to describe an SMSF has created the misconception that you need to do everything yourself when it comes to running your SMSF. Yes, as Trustee you assume much more responsibility than you would do if your super were elsewhere, but this does not mean that you are on your own. For a long time, the SMSF industry was the fastest growing industry in the country. This developed an SMSF profession full of SMSF specialists and businesses that allow you to outsource most of the functions. When it comes to the compliance of your SMSF, your SMSF Accountant or Administrator should not only be keeping your SMSF compliant, in partnership with a registered ASIC Auditor, but also be minimising the amount of time you are spending on your SMSF.
Whether or not an SMSF is right for you is something best decided with advice from a Licenced Adviser who can help you understand that there are some things about SMSF’s that you currently think or believe that might simply be untrue. A better decision can be made when you have all the information and whilst you should always surround yourself with professionals when it comes to your finances, you should also educate yourself to be able to engage more. The long-term benefits of better engagement are obvious with your super regardless of whether your nest egg is in an Industry, Retail or a Self-Managed Super Fund.