Paul Clitheroe
Paul Clitheroe

SMSFs - make sure they're right for your circumstances

AUSTRALIANS are embracing self-managed super funds at a rapid rate with close to one million people now a member of their own fund. But a report issued earlier this year by the Australian Securities and Investments Commission (ASIC) highlights some of the lesser known downsides of managing your own nest egg.

Two of the most common reasons for starting up a self-managed super fund (SMSF) are the desire to take control of personal retirement savings and a drive to reduce investment costs. These are perfectly reasonable motivators however there are some aspects of SMSFs that I suspect many people don't think through carefully. You have to make sure they're right for your circumstances.

Firstly, SMSFs won't necessarily lower the costs of your nest egg. For starters, the set-up costs can be over $2,000.

You also need to factor in the ongoing expenses involved in running a SMSF - many of which are unavoidable as they involve mandatory accounting, reporting and audit requirements. According to an SMSF report by actuaries Rice Warner, it could cost anywhere from $1,163 to $7,443 annually to operate a SMSF depending on the size of your fund and the amount of administrative work you outsource to professionals.

The bottom line is that if you're willing to do a large part of the work yourself, according to that same report, you'll still need at least $200,000 in a SMSF to get the sort of value for money you would expect from a professionally run super fund. If that's not the case and you intend to outsource the bulk of the administrative work, you're going to need closer to $500,000 for a SMSF to be financially worthwhile on a costs basis.

There are other considerations too. One of the less well-understood pitfalls is that SMSFs don't enjoy the same regulatory protection as retail or industry funds, which are regulated by the Australian Prudential Regulation Authority (APRA).

Unlike members of APRA-regulated superannuation funds, SMSF investors are not entitled to receive compensation in the event of theft or fraud. In other words, if an investment goes belly up don't expect automatic compensation from the federal government.

Also unlike members of APRA-regulated superannuation funds, SMSF members do not have access to the Superannuation Complaints Tribunal (SCT) to resolve complaints. If you have issues or disagreements with your other fund members about how the SMSF is being managed, it is up to you to sort these out between yourselves or seek legal advice, which is a further expense.

ASIC has noted that it has encountered situations where people have established a SMSF even though their personal finances have been in disarray.  None of us like to think we can't manage our own money but if your personal money management isn't spot on, it could be disastrous for your retirement to add a SMSF to your list of responsibilities.

Don't get me wrong, managing your own nest egg can be financially rewarding and personally satisfying. Just be sure to think through the process and consider if it is a step that's right for you, that will really leave you better off in retirement. After all, that's the whole point of superannuation.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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