Self-managed super funds offer great flexibility, but concerns that they are being oversold continue to surface.
The financial adviser Crystal Broadfoot says she is dismayed at the number of people she is seeing who have been poorly advised to set up a self-managed super fund (SMSF) - frequently because they have been drawn by the buzz around holding property inside your own fund.
"We do see the need for [DIY funds] in certain and limited situations, and that's generally with your high net-wealth, high super-balance clients," says Broadfoot, of the Melbourne-based firm Clements Dunne & Bell, a member of the Count Financial group.
"But we are dismayed at the amount of clients who come to us who have been, what we feel, incorrectly set up with an SMSF."
Those people either have very low balances or rely totally on platform-administration services, "which defeats the purpose of an SMSF" and adds an extra, expensive layer of fees to the costs already involved in having a DIY fund, she says.
Broadfoot sees a connection with the rule change that allowed DIY funds to borrow to invest, which has drawn property promoters to the SMSF sector.
A wealth management partner at HLB Mann Judd Sydney, Jonathan Philpot, has similar concerns.
"Many property spruikers are encouraging people with super balances of $50,000 - and even less - to purchase a residential property in their SMSF, with the property being geared to about 70 per cent," he says.
His rule of thumb is that most people should not consider an SMSF unless they already have a balance of $300,000.
The first problem with the property strategy is that gearing does not make sense in a low-tax environment, Philpot says. It is better to use it where a taxpayer is on higher rates.
Second, focusing on property in this way means an SMSF may not be well diversified, and this will be so for a very long time while it is repaying the loan with rent and super contributions. There is also the challenge of meeting loan payments if the property falls vacant, he says.
An allied problem can be access to cash for members as they go into pension mode. "You can't sell the bathroom, you can't sell the kitchen" to pay a pension, Broadfoot says.
At last count there were more than 478,000 DIY funds, holding $439 billion of assets, making them the largest and fastest-growing sector in superannuation. SMSFs now account for 31 per cent of super assets, ahead of retail funds (27 per cent) and industry funds (19 per cent).
The Australian Securities and Investments Commission's Peter Kell told a conference of financial advisers in July that while SMSFs can have benefits for experienced consumers, they are "not suitable for all investors".
Kell says the regulator is concerned that not everyone is aware of the time and resources needed to run a fund the expertise needed to manage it effectively and the legal responsibilities, including their potential liability.
On the other hand, the chief executive of the SMSF Professionals' Association of Australia, Andrea Slattery, defended SMSFs against the charge that they were being opened with low balances, saying the latest statistics show that both the average and the median balance of SMSF members were trending upwards.
Slattery points to the Cooper review of the superannuation system, which concluded in 2010 that there was no need for wide-ranging changes to the SMSF sector and, specifically, rejected the idea of a compulsory minimum.
Philpot says SMSFs offer people with healthy super balances a range of benefits, but the flip side is they can be complicated structures.
His rule of thumb of $300,000 is based on the likely compliance costs (for accounting, auditing and tax returns), which start at about $3000. At this level, the costs would be equivalent to a 1 per cent fee - in line with what you would pay for a managed super fund.
Then there are other transaction and investment fees to consider, such as share brokerage, fees charged by wholesale fund managers, and bank charges. Even though you are "doing it yourself", you may want to pay for advice and help with administration.
The disadvantages: five questions to ask yourself
- The Australian Securities and Investments Commission MoneySmart site suggests asking yourself these five questions:
- Will I save money or waste it?
If you pay $3000 in professional fees to administer a self-managed super fund with just $60,000 in retirement savings, your expenses will be 5 per cent. You need to be sure you have enough money to absorb the fees, otherwise your retirement savings could disappear within a few years.
- Will I lose valuable benefits?
Managed super funds usually offer life and disability insurance and a range of investment options. If you set up a DIY fund, you have to organise and buy these yourself.
- Will my fund outperform a managed fund?
Super funds use professional managers to invest your super money. Can you do better than the professionals? If you're thinking about setting up a self-managed super fund just because you're not happy with your current fund, consider changing to another fund first.
- Do I know enough?
Do you know all your legal responsibilities? Are you on top of the investment market? Do you know the tax implications? Ultimately you'll be responsible for your fund, even if you receive incorrect advice from professionals.
- What if something goes wrong?
Sometimes things can go wrong. For example, you may lose money because of fraud. But DIY funds don't have access to the sorts of compensation schemes available to public super funds.
The $300,000 is not a hard-and-fast rule, though, Philpot says. Some people with lower balances may have plans to build their super quickly, and so an SMSF might make sense for them.
The benefits of DIY
If you can tick the boxes as far as being a good candidate for a DIY fund, there are some tremendous benefits, financial adviser Olivia Maragna says.
"Superannuation is now, in most cases, the biggest investment asset at retirement," says Maragna, owner of Aspire Retire Financial Services. "I'm finding that more retirees want to be able to have more control over it, because it does make up a large proportion of their assets."
Maragna, named this month as one of six finalists in the Adviser of the Year awards run by the Association of Financial Advisers, lists some of the main advantages of a self-managed super fund as:
Control: You can decide on how much to contribute and where to invest those funds.
Security: Your member benefits generally are protected from creditors.
Flexibility: Retirement income options can be tailored to a member and their family's specific needs.
Cost efficiency: Structured properly, an SMSF (which can have up to four members) can be cheaper than holding multiple superannuation funds.
Tax efficiency: You can minimise tax payable by the fund by using imputation credits available from dividends. Excess imputation credits are fully refundable to the SMSF.
Estate planning: An SMSF is the most flexible and tax-effective way for a member to provide lump sums or income streams to his or her surviving spouse, children or grandchildren.