Should I set up a self-managed super fund?
Self-managed super funds (SMSF) form the largest and fastest growing sector of the $1.9 trillion superannuation system with over 30,000 new funds set up annually and an estimated $600 billion of assets. Here are 8 things to consider before you set up an SMSF.
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What’s the latest?
- There are over 500,000 SMSFs and more than 1 million trustees
- The average balance of an SMSF is over $1 million
- About one quarter of SMSFs are under 200k and another quarter are between 200-500k
- About 40% of new trustees are under 45
It is fair to say that SMSFs are increasing in popularity and are being set up by ever younger people. In considering whether to set up an SMSF or not here are a number of important considerations. The most important question to resolve is: What is your objective?
Why do you want to set up an SMSF?
- Do you want to be in more control of your super and retirement planning?
- Do you want more investment and strategy choice?
- Is it to save on fees?
- Is it because you think you can invest and manage the money better than your current manager?
- Do you want to invest in something that is simply not available with your current fund e.g. a direct property?
- Do you want to use gearing as part of your superannuation wealth strategy?
- Do you want to be more involved in managing the money?
Any one or several of these reasons could be what you are trying to achieve. Whatever it is, you simply need to clearly articulate what it is for you and what you want an SMSF to do for you.
What does “self-managed” actually mean?
The words can easily bring to mind images of being left alone to do everything by ones “self”. The good news is that in reality most SMSF trustees will outsource most of the functions of running an SMSF while having control of who does what and when.
On a scale of 1 to 10, if a retail managed fund super product was a 1 in terms of your degree of annual involvement (or total apathy) an SMSF potentially is a 3-4 as it will require some extra involvement. But it is not a 9 unless, for example, you want to fully take on the responsibility of managing and trading a direct share portfolio - in essence turning yourself into a money manager.
Some people want to do this in their retirement, especially if boredom and a reduced sense of utility gets the better of them, and so they pass their time in retirement managing money.
But most will outsource the function of money management to professionals or invest in assets in a manner that is very passive e.g. buy and hold blue chips or investment in direct property as two examples.
So the term “self-managed” really can mean whatever you want it to mean. It can be “High Outsourced/Low Self” or “Low Outsourced/High Self”.
Do you have time to manage it?
An SMSF will require more time than a completely outsourced solution as a managed fund with a bank or an industry super fund. Do you have the time? Will you make the time?
If you will make some time for your SMSF, with many of the main functions outscored, then an SMSF might be for you. If you want to be totally hands off then it might not be for you.
Do you have the right temperament?
If you struggle to make decisions an SMSF might not be for you. The trustee of an SMSF needs to be able to get information and advice and after weighing it up, make a decision.
If you are a poor decision maker or worry and second guess yourself about what is right or wrong, then taking on the responsibility of SMSF trusteeship might not be for you.
Geared vs ungeared strategy
The most important part of developing an investment strategy is to first decide whether you will be using gearing or not.
If you decide to use gearing as part of your superannuation strategy then usually an SMSF is the best way of accessing low cost leverage, especially if you want to embark on a strategy of buying a direct property in an SMSF.
Gearing has the potential to amplify rates of return on capital upwards but also amplify losses. Gearing increases risk and ultimately you will be rewarded or punished for the extra risk taken.
The 6 main components of a well-structured gearing strategy are:
- Adequate timeline
- Good cash flow
- A considered debt repayment strategy (gradual vs asset sale)
- The right temperament
- Good buffers in case things don’t go to plan
- Appropriate gearing ratios (not over doing it)
If you are happy with an ungeared and entirely managed portfolio with no direct assets, you may be able to achieve this without the need for an SMSF. Any number of platforms can nowadays provide you with a wide array of Exchange Traded Funds (ETFs) and managed funds to choose from.
But if you want direct ownership of assets or a wide menu of unlisted assets such as unlisted funds and syndicates then an SMSF is the tool of choice.
Control and responsibility
The main reason Australians are setting up SMSFs is that they want control over how their money is invested and managed. An SMSF will give you near total control over your funds and essentially an unlimited menu to choose from.
You can invest in almost anything that you would have been able to invest in personally. But with that control and freedom comes responsibility. You need to be comfortable with the control and ensuing responsibility that comes with having an SMSF.
Much has been written on what the right number is and the truth is that the answer is “it depends”. According to the law there is no minimum balance, but that doesn’t mean that with $50,000 you should rush out and set up an SMSF.
The cost of running an SMSF with some professional assistance can vary between $2,000 and $4,000 per annum. Clearly, it is uneconomical to run a $50,000 SMSF at these numbers.
It also depends on how much you are likely to contribute. Someone with $125,000 that is putting in $50,000 pa is different to someone with $225,000 that will not be able to contribute anything to their super.
If I have to put a number on it, I would say that $150,000 to $200,000 is a reasonable range depending on circumstance where one could consider setting up an SMSF.
In summary, an SMSF is not for everyone. But in the right situations it can be a powerful tool in your journey towards financial independence.
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