There is no doubting the term self managed super fund, abbreviated SMSF, has become part of the common vernacular. While some in the finance industry are pushing SMSF as the new road to riches, we look at the practicalities of self managing your super and why younger members are starting to take the plunge.
According to reports from the ATO, between 2010 and 2014 the number of active SMSFs grew by 29% to over 534,000 funds. Not only was growth in new SMSFs strong, we also started to see growth in members in the 35 – 44 age bracket.
Currently around 31% of SMSF members are aged 49 years and under, proof that SMSFs are no longer just for people who have retired. It is fair to say that people nearing retirement want to take an active interest in their super, but why would younger people want to add this responsibility to their already busy lives.
Why a SMSF?
Anecdotal evidence suggests that people view superannuation with an air of suspicion. Most would recognise that they have a magical pot of retirement money, but few understand how it works. The superannuation industry has not yet realised that there is a marked difference in client outcomes between the mere act of owning a super fund and client’s taking ownership of their retirement strategy.
The biggest problem we see from public offer super funds, industry funds included, is that they are not engaging their members. Members are, for the most part, provided with a less than engaging annual statement and a figurative pat on the head to suggest that there is no need for their concern.
What is a SMSF?
For once a finance acronym makes sense; a self managed fund is exactly as the name suggests, you now have control of your super. Self managing not only requires you to ensure your monies are invested for retirement, you also need to ensure the accounts are up to date and your fund is compliant in the eyes of the law.
Technology is playing a big part in the rise of the SMSF as it is allowing people to not only manage their retirement assets like the big guys, no doubt in a more transparent and increasingly cost effective way.
Super is a special type of trust structure designed to accumulate and later pay out retirement savings. To start your own SMSF you will need to setup one of these super trusts.
While SMSF trust deeds were once the sole responsibility of lawyers and accountants, it is now possible to set one up online, in a matter of minutes. The setup is, for the most part, the easiest step in the process and can be done by a reputable operator for anywhere between $250 to $1,500.
Administration & Compliance
The big advances in SMSF technology have come to the most mundane yet most necessary part of the process, the administration and compliance. We have seen a rise of systems that allow SMSF assets and transactions to be recorded automatically using real time data feeds.
In most cases, the administration function of a SMSF is a fixed cost. The administration cost in the largest determinant of the economic starting size for a new SMSF. Ongoing administration and compliance cost for a reputable operator will come in around $1,000 to $2,000 per annum, depending on the investments held in the SMSF.
Looking at the economics of it, if we assume an average cost of $1,500, the percentage cost to a $150,000 fund will be 1% p.a. As a SMSF grows, the administration and compliance costs will decrease as a percentage of the fund, such that a $500,000 fund would be spending 0.03% per annum.
The other important, yet often overlooked, factor is investment. Asset allocation data from the ATO suggests that there is no shortage of SMSFs that retain an overweight holding in cash, simply because they didn’t think past the initial setup process.
The industry leads us to believe that a SMSF cannot compete with the big boys when it comes to money management. Some suggest superannuation is best managed with the economies of scale the big super funds have. Thankfully, recent developments on the ASX mean that this argument no longer holds any weight.
One such development has come with the rise of exchange traded index funds or ETF’s, which are allowing smaller investors to gain exposures to large parts of global investment markets for a fraction of the cost.
In my view, some investors seem to take the term ‘self managed’ far too literally, often with disastrous results. For most, super is their largest asset outside their family home, so we liken the opening of a new self-managed fund to becoming a homeowner.
Using this analogy further, a homeowner will call a plumber is a pipe bursts, an electrician if the electricity fails and an architect or builder if they want to build an extension.
So when it comes to managing your SMSF you should also have a team of experts you can call upon.
You need to have a super administration expert, an insurance expert, an estate lawyer and an investment expert, on your speed dial.
When it comes to taking responsibility for your retirement there is no doubt that it is a case of the sooner the better. If taking responsibility means setting up a SMSF, then ensure you take the required steps to position yourself for success. Most of all recognise that a SMSF in itself is not a road to riches; it is just one route on the journey to a self-funded retirement.
The Wealth Guy