Tuesday, 30 July 2013

What are Self Managed Superannuation Funds and are they a good idea?

This is a sponsored post.  It was done in partnership with Clime, an Australian based fund manager.  All the content included in this article is my own and I have not had to have it 'approved' or vetted in any way.  I am happy to do sponsored posts where there is no interference in the content of my post.

This post is all about self managed superannuation funds.  It will cover the topics such as 'what is a self managed super fund (SMSF)?', 'why you would want to use them?' and 'when do they make sense and when do they not?'

What is a self managed super fund?

In essence a self managed super fund is a small superannuation trust which is set up for the benefit of an extremely limited group (1 - 4) of members.  It is a mini version of the large superannuation funds out there but instead of being pooled with thousands of other investors, this superannuation trust is only for the benefit of a select group.

Why would you set up a SMSF?

The primary reason people set up SMSFs is because they want more control over the investment process and assets within the SMSF.  This can be for a variety of reasons including:

  • They are able to more closely tailor the investments in the portfolio to their personal circumstances
    • For example by duration matching investments compared to when the individual investor will need the cash
  • They believe that they are better able to make investment decisions than investment managers
    • This is one of the primary reasons that people choose to set up a SMSF however it comes with it's downsides
      • It is all well and good to believe that you can do better than the fund managers who are currently managing your superannuation money but have a go at doing it yourself (with a phantom portfolio) and see how you go before doing it
    • The extra level of control over the investments also means that you can choose investments that you are confident with
      • I argue that people should only invest in what they understand - it also often means that they can get better results than if they trust other people to do their investing
      • For example if you want a property investment and are a particularly adept investor in property there is a possibility that you can get a better return from your own investment than a property fund that is part of a large superannuation fund
There are also some other reasons people set up SMSFs including:
  • You can save money
    • The amount of money you can save often has to do with scale
    • There are quite significant fees associated with running an SMSF - see the section below on what you have to do when you have an SMSF - so in order for the fee savings to work you need to have a significant amount in your self managed super fund
    • MoneySmart, the Australian government's financial advice website recommends having at least $200,000 in superannuation before setting up an SMSF
What are the downsides to setting up a SMSF?

The real downsides from SMSFs come from the time and effort you need to invest in it.  For many of us, superannuation is just a
'set and forget' type investment.  We don't need to think about it much from day to day.  This is not true if you run a self managed superannuation fund.  

If you run your own SMSF then some of your responsibilities will include
  • Carrying out the role of trustee or director which will impose legal duties upon you
    • People often skim over this point but it is important!
    • If you do something wrong, or have been advised badly, the legal liability and responsibility still sits with you!
  • Using the money only to provide for your retirement
    • You cannot mix money or use your money for any other purpose other than investing for your retirement even if you are having a hard month or just need a bit of spare cash - it is NOT like your other investments in this sense
  • Setting and following an investment strategy
    • This means having some financial knowledge and knowing when to ask for advice and who to ask for advice
    • It also means that you are responsible for your own financial well being when things go right and when things go wrong
  • Keeping comprehensive records and having your SMSF audited annually by an approved SMSF auditor
    • The only time most of us think about our financial records is around tax time when we are looking for statements and receipts and if we forget something it means we can't claim it but it isn't really that big a deal
    • Your SMSF needs to be audited every year so your record keeping processes need to be really good!
There are other downsides which are mainly associated with costs (which you do not have when you invest through a large superannuation trust) including:
  • Ongoing professional expenses
    • You need to pay for ongoing professional expenses including accounting, audit, tax, legal and financial advice 
  • Insurance
    • Normally you get some form of insurance cover as part of your superannuation fund - you now need to have this yourself 
    • You need life insurance which will typically include income protection and TPD cover

Do I have a self managed superannuation fund?

Not yet.  This does not mean that I will not get one in the future however at the moment my situation does not warrant one for several reasons.  I do not have close to enough in superannuation to make it worthwhile from a cost perspective and although I have more than enough in savings to make it cost effective, this would require putting everything into my superannuation fund which I am unwilling to do.  I am in my late 20s and I am not willing to put away all my savings until I am 65.

I may set one up in the future however large superannuation funds are constantly lowering their fees (especially the industry super funds) and are making their products much more flexible such that you have a lot more control over your funds than you used to.

Whilst I am a big fan of people taking control of their finances and I wish more people would do it, I think the large superannuation system in Australia is great for those who do not have the time nor the expertise to manage their own funds.  To manage one of these self managed superannuation funds you really do need to be quite financially savvy and willing to take on the responsibilities that come with these funds.

Do you have your own self managed superannuation fund?  Why did you choose to have one?

As always this is not personal financial advice - please talk to your own financial advisor before doing anything.  As a reminder this post was a sponsored post but all the content and opinions were my own.

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