Insurance is a risk when doing it yourself
Spend time watching commercial TV, listening to the radio or using the internet lately and you will have noticed the massive advertising campaign being conducted by the self-managed superannuation fund (SMSF) industry. It pushes the virtues, as the industry sees it, of managing your own super fund. And the message appears to be hitting home, with members of large super funds seemingly receptive to the messages from SMSF promoters.
A recent CoreData survey of members of large funds showed that less than one-quarter said they were likely to establish, or join, an SMSF in the next five years. CoreData found while most people with their own funds are in their 50s and over, the fastest-growing age cohorts of those starting their own fund are in their 30s and 40s. Who could argue with the ads asking whether we would like to take control of our super and that we should be paying lower fees? But just because they are being marketed in this way does not make them suitable for everyone.
Most people probably do not want to put in the time and effort required to run their own fund. Every time I write about SMSFs, warning to be careful, I receive emails from those who have their own funds, saying they have never looked back and the set-up is simpler to run than they had expected.
For some people, running their own fund does makes a lot of sense, and good luck to them. But while most people like the idea of control, they baulk at actually having to make investment decisions. And no matter who is hired to run the SMSF, it is the trustees of the fund who have the legal responsibility for the fund.
The best of the large funds charge total fees of about 1 per cent of the member's account balance. It would be a struggle to keep costs as low as that with an SMSF unless the fund holds a substantial amount of money.
Large funds are adding direct-investment options whereby members can buy shares and term deposits so that there are fewer reasons for members to strike out on their own. There are other potential problems of running a super fund. And members need to be clear about these before taking the plunge. Large funds usually provide cheap life insurance with automatic acceptance.
Trying to obtain insurance on your own will probably mean disclosing your medical history to the insurer and submitting to a medical examination. Insurance could be refused or you end up paying through the nose for it. There is some evidence that SMSF trustees are leaving some money in a large fund for the insurance. SMSFs are outside the superannuation compensation scheme. This is the scheme whereby all members of large funds have to pay a small levy to compensate those members of large funds who lose money because of fraud.