Bruce Brammall, The West Australian, 28 September, 2020
I love self-managed super funds. But, without doubt, too many Australians dive into this pool and crack their skulls on the bottom.
Australian investors love control. We love direct property and direct investing in the share market. And, in recent decades, we’ve come to love self-managed super funds – ultimate control over the quality of our retirement.
Exerting control is a power sought at various stages of life. For most, this is treated respectfully, but some take it and mess it up badly.
But with great control comes great responsibility. And taking control of your super via a SMSF isn’t for everyone.
There are approximately 1.1 million members of around 590,000 SMSFs. I estimate at least 100,000 of those funds should never have been opened.
They were opened for the wrong reasons. Because the member wanted “control” but didn’t really understand the work involved, or on the conflicted advice of professionals. Because someone hated paying fees, because the previous super fund’s returns were poor, or because they thought they knew enough about investing to do a better job.
If you’re thinking you want to decide what shares your super invests in, many superannuation platforms will allow you that control. If it’s about performance, other funds or investment options are available.
And if you’ve got a low-ish balance and feel knowledgeable enough to choose your own BHPs, CSLs or CBAs, then this is probably the best option for you.
But what is a “low-ish” balance? And when is the right time and reasons to start a SMSF?
In my opinion, a low-ish balance is anything below about $250,000. There are costs associated with running a SMSF. Even doing it on the cheap is going to cost you a few thousand dollars a year in accounting fees, audit and supervisory fees to the Australian Tax Office.
Anything below that, stick with a low-cost retail super platform that will allow you to pick your own assets. More and more industry funds are also allowing greater accessibility to ASX-listed assets also.
Between $250,000 to $500,000, it can make sense to open a SMSF. However, in that range, you are probably going to need to do most of the work yourself (excluding accounting and audit).
Between about $500,000 and $1 million, SMSFs start to make some sense. Certainly, at the upper end of this range, the cost of getting professional advice can be worthwhile, while keeping costs lower than your previous fund.
You can really start to build proper direct, diversified portfolios, while keeping fees down.
From about $1 million, they really make sense from a fee perspective alone. Many of the fees paid with a SMSF are static and, from this level, they can become quite small proportions of the overall balance.
One of the only good reasons for starting a SMSF below $500,000 is for those who wish to buy a geared property in the fund. This is where money is borrowed to purchase a property.
Quality property investments can be a spectacular wealth creator. Making sure you get those investments right, however, involves significant risk. Getting it wrong can be disastrous. Hint: Avoid property developers.
Geared property in a SMSF is only right for some investors. My belief is that suitable candidates are those who already have either experience with direct property (outside of super in their own names), or have run their own businesses.
Why? Because geared property has some prerequisites. Firstly, you need to understand the lumpy nature of property cashflow – tenants can get behind on the rent and it can be at the same time big property expenses lob. Secondly, you need to know how to hire and fire. Occasionally, you need to sack the hired help.
For every 10 people who ask me about setting up a SMSF, I successfully talk about eight of them out of it. A ninth probably goes and sets one up anyway, while the 10th is ready.
But SMSFs aren’t just about control of your investments. You get a greater degree of control over your insurances, contributions and estate planning.
And, importantly, tax. SMSFs do allow for greater control of the tax paid in super, particularly when the fund starts paying a pension.
There are many ways to take control of your super. But it doesn’t always need to lead down the SMSF path.