Take charge or stay the course: is a self-managed super fund right for you?

Public superannuation funds (often called industry or retail super funds) have not been immune to recent market volatility, and the difference between the best and worst-performing super funds is growing.

When you analyse the impact on compounding interest over time, the numbers might shock some into action.

It’s perhaps part of the reason why self-managed super funds (SMSFs) are becoming increasingly popular. But is an SMSF right for you?

Everalls Wealth Management director and DFK Everalls senior manager Melissa Healy says the overarching consideration is simple.

“Are you willing and able to liaise with your accountant and/or financial adviser to manage your own fund correctly? If you’re not, you might as well keep it in the hands of a public fund to be managed for you,” she says.

“There are pros and cons to both.”

Most people who pursue an SMSF want more control in the decision-making processes around their retirement nest egg and value the flexibility of these funds.

“SMSFs offer access to a much wider range of investments, from direct shares to property and even artworks and antiques. Commercial properties seem to be attracting increased interest from investors, and are only available through SMSFs,” Melissa says.

“They also offer control over the timing around when to buy and sell.”

While industry funds are cut off from certain investments, they are becoming increasingly flexible.

Though many public super funds default to conservative strategies with options to switch to “balance” or “growth” pathways, many are introducing additional options including member-direct offerings that allow people to direct their public super providers to invest in certain direct shares and exchange-traded funds (ETFs).

“Technology has had a big impact on this – it’s much easier now for public super funds to be able to offer a greater variety of options,” Melissa says.

The cost of operations is another consideration.

Each trade in an SMSF attracts transaction fees and possible taxes, such as capital gains tax, while public funds generally charge flat fees based on the amount under management. Melissa says those fees have recently become more competitive.

“In the past, fees for public funds have been quite high. Once your super savings reached a certain level, it often became more cost-effective to switch to an SMSF, even if it meant paying a financial adviser to assist with choosing investments,” she says.

“There’s now a bit of competition to make public funds cheaper.”

SMSFs allow for up to six members to pool their savings and pay for just one tax return and one set of account fees.

They also offer more control over implementing tax-minimisation strategies that can help manage retirement savings.

For example, when a person with a public fund is ready to switch it from an “accumulation account” (which is accumulating income) to a “pension account” (when the money starts to come out), the process is seamless for an SMSF, but for a public fund, the accumulation account is closed before a pension account is opened, and all the investments sold, incurring taxes and fees.

Other tax advantages include the ability to buy your business premises and lease them back to the business, essentially making your SMSF your landlord. This means instead of your rent money being dead money, it becomes a tax-deductible rental payment in your business towards your own retirement. However, diversification is critical.

“If the majority of your super is invested in one asset, that’s not best risk management practice,” Melissa cautions.

“The same goes for investing in rental properties – we don’t recommend this for people going into retirement because rentals are inflexible when it comes to liquidity and you might not have sufficient cash to meet your trustee duties.”

SMSFs can also offer more flexibility for people with specific estate planning needs or those who want control over when they want to start drawing benefits from their fund and in what form. They can also acquire particular assets from members, such as an inheritance or regular savings, which can be significantly tax advantageous in the long term.

However, there’s a threshold at which these tax-effective pre-retirement strategies become cost-effective.

“An SMSF is generally not cost-effective unless you have more than $500,000 between a couple,” Melissa says.

The bottom line is, SMSFs offer more flexibility and control over your nest egg – but with more power comes more responsibility. The buck stops with you as the trustee of the fund, in terms of deciding on investments, record-keeping, ensuring accounts and taxes are done correctly, and monitoring performance.

“For some clients, managing their super fund is their job in retirement, and they love it,” Melissa says.

“Others have better things to do in their retirement or it simply isn’t in their wheelhouse.

“It comes down to your personal circumstances, proficiencies and financial goals. At DFK Everalls, we’re completely agnostic and only interested in guiding you to find the most suitable option to meet your goals.

”It may be by assisting you with just the administration of your fund or by managing everything on your behalf.”

Curious about whether an SMSF is the right choice for you? Click here to download a free e-book from Everalls Wealth Management.

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