What an irony it would be if, having opted for a self-managed fund (SMSF), you found yourself back where you started with indifferent performance and high fees – the very reason you ditched your super fund in the first place.
The good news is, that needn’t be the case.
It doesn’t take rocket science to set up a self-managed super fund (SMSF). Most people who do so are glad they did. At the same time, managing your retirement savings is a major responsibility and no trivial matter.
There is a whole host of things you need to consider.
For example, do you have the resources, time and ability to run it? Should you have a shelf company as the trustee? What about compliance, life insurance, set-up and running costs? How sound is your investment strategy? What safety net applies if you are a victim of fraud?
Monica Rule is a specialist in the area, having worked for many years as a senior compliance officer at the Australian Tax Office, auditing SMSFs. She says choice of investments, control and fees are the main reasons people set up their own super fund.
But she warns: “SMSFs are generally less costly to operate as the members who are trustees control the investments and therefore control the expenses. But if they don’t comply with the law, having an SMSF can end up costing them their entire retirement savings.”
Rule says you are looking at about $2500-plus in annual administration fees, made up of the accountant’s fees for preparing the financial accounts and statements, the auditor’s fee to audit the accounts before lodgement of the annual tax return, and the supervisory levy of about $321 for the ATO.
As a trustee you have legal duties and you need to ensure what you are doing is in accordance with superannuation law.
Any breach can spell trouble with the tax office, which regulates these funds, and in a worst-case scenario it can render your fund non-compliant.
The fact that it’s your money doesn’t mean you can do what you like with it. To comply with the rules, your fund must meet the “sole purpose test” – that is, it must be managed for the single purpose of providing retirement benefits.
It’s not an ATM to make loans to bail out indebted family members or buy property to provide them with free accommodation.
“The average retiree does not have the skills or the experience to do it on their own,” says Noel Whittaker, a financial adviser and leading media commentator.
“That’s why it is imperative that they engage an administration company which will do the administration work for them.
“Basically, the two components of superannuation are administration and investment. The administration company can do the former and they can do the investment on their own or engage a financial adviser.”
He says most people are not aware of the hefty penalties if their fund is made non-compliant.
“It is 46.5% of the taxable component of the fund at the previous June 30. For example, if you had a $2 million SMSF and the taxable component was $1 million, the penalty would be $465,000.”
So taking the DIY approach in the strictest sense could cost you dearly both because of contravening the many rules and restrictions, as well as because of poor investment choices. The trick, then, is to get the balance right between taking good advice when and where needed and doing the rest yourself.
“In my experience as a senior compliance officer in the ATO, I found that SMSF members who have the characteristic of ‘coach seeker’ are the ones who perform well with their SMSFs,” says Rule.
“These people are happy to seek clarification and assistance when needed. Whereas ‘controllers’ don’t always do well, as they don’t seek clarification on the complex areas of the law before jumping into certain investments (such as limited-recourse borrowing).”
Rule says there’s a third group.
“The ‘outsourcers’ are the ones who decide to have an SMSF because all their friends have one. But, of course, once they have one, they realise how much work and knowledge is required and hand it over to SMSF administrators to do all the thinking and operating for them. They most probably should have left their superannuation savings in a retail or industry fund.”
There is $1.8 trillion in superannuation, financial regulator APRA reports, and investors with the highest savings are typically attracted to SMSFs. Statistics also indicate their preference is for direct investments where they can exercise control.
An ATO overview of total DIY funds’ asset allocation fat June 2013 shows 31.1% was allocated to cash and term deposits, 32.0% to listed shares, 11.8% to non-residential property and 8.9% to unlisted trusts.
Max Newnham, a partner in accounting practice TaxBiz and an SMSF specialist, says retirement is often the impetus for people to switch to a DIY fund because they want control, wider investment choices, and the cost of running one in the pension phase can stack up well compared with retail and not-for-profit industry funds.
“Once you take that extra cost concern out of it, the ability [of retirees] to control their destiny in retirement and not having to worry about writing off letters, or phoning if they are wanting an extra payment from their pension fund, that’s one of the other major attractions of an SMSF,” he says.
Newnham says a reasonable cost for setting up a fund with a corporate trustee is between $1200 and $1500 depending on how much work is done.
Administration fees can range from “zero” to $5000 to $6000 a year. He agrees with Rule that you can get a decent service for about $2500 and then pay for financial advice on a fee-for-service basis when you need it. “There are some providers that make it cheaper from an administrative point of view but then take a clip from being able to recommend investments,” he says.
“The service often comes at the cost of reduced investment choice and having to use their bank account or online share service.”
Variations in charges and services include being charged as a percentage of the total value of your fund. Newnham says that in those cases “people with higher values are effectively subsiding those with lesser values and it is hiding the true cost of the service”.
The SMSF sector is running hot at present. Whenever that happens there are bound to be some operators ready to make a quick buck at your expense. Being circumspect and well informed is often your best line of defence.
For example, you would have to ask how an administration service is making its money when it advertises “zero” set-up fees.
Newnham, who started the smsfsurvival centre.com.au website, recommends you run a mile if you find yourself at a free seminar where you have “three or four presenters all extolling the virtues of SMSFs within a single investment or particular investment class” and offering to organise everything for “free”.
They are invariably making large commissions from flogging the product, often real estate, and there is more in it for them than for you. In coming months we will cover what you need to do to set up and run your own fund successfully and how to avoid the traps, starting with the trust deed.
10 steps you must follow to set up your fund
The process of setting up an SMSF is highly formalised due to the legal and taxation requirements. This means each step of the process must be done in order:
1. Decide on a name for the fund and who will be the members.
2. Decide whether you will have the members act as trustees or form a company to become the trustee for the fund.
3. Have the trust deed drawn up.
4. Elect to be a regulated SMSF.
5. Apply for a TFN and ABN for the fund and register for GST if applicable. Open a bank account (or a number of accounts) for the trust.
6. Sign trustee declarations.
7. Decide on an investment strategy.
8. Put in place administration and accounting systems.
9. Receive contributions and rollovers.
10. Invest monies received.