While there has been significant growth in the self managed superannuation fund (SMSF) market for a number of years – for very good reasons – there also seems to be a large amount of misinformation put out by vested interests that confuse people when they consider setting up an SMSF.
Mr Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney, says that SMSFs offer people who are building healthy superannuation balances a range of benefits, however they can be complicated structures.
“When talking with clients, it is clear that they are very attracted to certain elements of SMSFs, but haven’t always fully understood all the considerations – often because they have only spoken to those who have a vested interest in getting them to set up an SMSF.”
He said that some of the more frequently asked questions that he receives include:
How much should be in super before setting up a SMSF?
Mr Philpot said that this will vary according to people’s circumstances but he usually recommends $300,000.
“Given that the compliance costs of a SMSF for accounts, audit and tax returns start at around $3,000, this is equivalent to a one per cent fee. This is in line with the lowest managed super fund fees, including industry super funds.”
He said that the minimum size is not a hard and fast rule, however, and people with less in their fund, but who have plans to build their superannuation savings as fast as possible, may well be advised to consider an SMSF.
Are these the only fees?
There are usually other transaction and investment fees, depending on the investments undertaken. These can include share brokerage, wholesale managed fund fees, bank charges and, if required, adviser fees.
Do I need an adviser with an SMSF?
Mr Philpot said that it is worth considering an adviser.
“Superannuation is a complex area and everyone should seek advice as their super balances build, whether they have an SMSF or not.
“While adviser fees may seem to increase overall costs unnecessarily, it needs to be compared to a situation where you are without any advice. It has been shown that those who get financial advice accumulate more wealth than those who do not.
“Advice will cover superannuation strategies that aim to minimise the amount of tax payable in retirement, and also investment advice which focuses on the long term asset allocation of the SMSF and helps trustees to deal with the emotional rollercoaster of share market fluctuations,” he said.
Should I buy an investment property in super?
“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%. This can cause problems for the members.
“The major problems I see with this strategy are, firstly, that gearing does not make sense in a low tax structure. It is better to have it where a taxpayer is on higher rates.
“Secondly, the lack of investment diversification in the SMSF will exist for a very long time while it is repaying the loan with rent and super contributions and the challenge of meeting loan payments if the property is not rented.
“Another problem is the possibility of access to cash for members who are in pension mode,” says Mr Philpot.
What benefits do control and flexibility bring?
As superannuation is a trust structure, the legal owners of a trust are the trustees which, with SMSFs, are usually also the members. However retail or industry super funds do not give members control over their super balance.
Most would agree that taking control of an asset that is likely to be second in size only to the family home makes sense.
The more obvious benefits are with flexibility. This includes flexibility in regard to investment choice through to flexibility with super contributions. Another area of flexibility is when the SMSF is paying a pension. Being able to withdraw pension payments when required is much easier and the process much quicker.
What obligations are there?
The main legal obligations are that Trustees must:
act in accordance with the fund’s trust deed and the governing legislation
prepare and implement an investment strategy
lodge annual accounts and returns and have the fund audited
There are also a number of other obligations in recording investment transactions and ensuring compliance, but these are not onerous.
Can I have an SMSF without all the hassle?
This is a good question as there are options for people to have all the benefits of an SMSF without doing all the work.
“For instance, advisers can provide a service to take care of all the management and investments in the fund, as well as all compliance issues. This is arranged according to the wishes of the trustees, so the trustees retain overall control and responsibility but outsource most of the work,” says Mr Philpot.