SMSF’s: Why should you take control?

As the employee superannuation guarantee is increasing from 9-12% by 2019, you should really be looking at your superannuation as a key asset and start reviewing investment options.  

This week we investigate what the self-managed super fund (SMSF’s) system is, its trends, and how it can be a beneficial option for those of us who would like to take control of this key asset.

Many Australians have continued to be disappointed by the fees, current structure and performance of their funds since the Global Financial Crisis (GFC), with most funds averaging a return of 3.4% per annum from 2002-2012. This, in addition to the increase in compulsory contributions and increasing fees is ample evidence as to why there has been a spike in people leaving retail and industry funds.

At the moment, the fastest-growing sector is SMSF’s, having grown by 49%. It is now the largest superannuation sector, with approximately $432 billion of the $1.4 trillion of funds under management in Australia.

An SMSF means you, the trustee, can take control of your superannuation fund and invest in asset classes that you are comfortable with. You can also design portfolios, which suit exactly what you are trying to achieve from your superannuation. 

In addition, there is the flexibility of investing in a greater amount of asset classes, which retail and industry funds do not offer. These asset classes include direct investment properties, precious metals (gold and silver) and most derivative classes.

An SMSF can have up to four members, therefore you, your partner or even your entire family can contribute to the same superannuation fund. This increases the pool of funds to invest, while the investment strategy is tailored to what you are comfortable with.

Another advantage of SMSF's is the transparent fee structure. Currently, the fee structures of retail and industry funds fall under what is called a ‘funds under management’ (FUM) scheme.  This system means the fees you are charged is a percentage of the amount you hold in your superannuation. The amount is compounded much like a mortgage loan; however, it is not a reflection of the funds performance.

An SMSF falls under a fee-for-service structure, therefore the fee is agreed upon and in most instances it does not increase in a 12-month period, even if there are continuous contributions going into the fund over that period of time. 

There are some things you need to be aware of when deciding whether an SMSF is the right option for you. The first thing to consider is if the establishment cost of an SMSF is more expensive than a retail or industry fund. As the trustee, you are liable and responsible for the compliance of the fund and ultimately you are responsible for what the fund is to invest in. There are however, many groups that can take this on for you to ensure the fund is compliant and taxes are up to date.

When you are assessing the feasibility of an SMSF, you should review the balance of your fund. There is a general threshold of $100,000 - $150,000 as a combined total balance to invest in an SMSF for it to make sense (from a pricing point of view- this does not take into returns).

Secondly, speak to a financial adviser who can assist you in establishing an SMSF.

Speaking to a professional will mitigate the risk of having a non-compliant fund, provide advice around investment options, guidance about what will suit your circumstances, as well as outline what you are trying to achieve from your superannuation.

Finally, implement and monitor an investment strategy on an on-going basis. You should never lose sight of your retirement goals and objectives.

For more information about SMSF’s, contact our team at L J Financial today.