There are numerous reasons why thousands of Australians have chosen an SMSF to hold their retirement savings.
Some reasons are very rational and make good financial sense, whilst others are perhaps not so rational, and in the worst case can be driven by financial professionals pushing an SMSF for their own benefit.
Today we will look at some of the good and bad reasons why people have chosen an SMSF.
Reduced fees for larger balances
This is perhaps one of the most common reasons for switching to an SMSF.
For an average size super fund, the fees for operating as an SMSF will generally be quite high, but when your SMSF balance moves onto the high side, the SMSF fee structure can start to work in your favour.
Let’s say the annual cost for an average SMSF is a flat $3,000 fee, and the annual cost for an average retail or industry fund is 1.5%.
If your super balance was $100,000 you’d be paying $3,000 per year if you went down the SMSF path, or just $1,500 if you went down the more traditional super fund path.
As we can see, for a balance of $100,000 you could be paying up to twice as much in annual fees for the privilege of having an SMSF.
But what if your super balance was $500,000? In this case you’d still be paying a fixed fee of $3,000 for an SMSF, or a whopping $7,500 for a standard super fund.
Clearly the flat fee structure that most SMSFs operate under can provide great cost savings as your SMSF balance increases.
Choice of investment options
This is another of the most common reasons given for starting an SMSF.
In the past, this was a very rational reason, however today many of the retail funds and even the industry funds offer a huge range of investment options.
Of course if you’re wanting to invest in direct property, art and collectables, and other exotic assets, an SMSF is the only option. But if you just want to invest in direct shares and managed funds, you don’t need an SMSF.
An increasing number of retail and industry super funds are incorporating direct share investments amongst their investment options. Often the direct share investment will be restricted to certain shares, but generally the top 100 or 200 will be available for investment.
Access to a larger range of investments is certainly a rational reason for going with an SMSF, but first you should make sure that there isn’t a cheaper retail or industry fund that offers the investment options you’re after.
There’s no question that if you want to invest in direct property using your super, you simply have to use an SMSF.
An SMSF allows you to invest in direct residential or commercial property, and even allows you to borrow to invest in property.
Recent changes have made direct property investment in an SMSF even more attractive, as fund holders can now use their SMSF balance to complete renovations on any property owned by the SMSF.
Another benefit of direct property investment via an SMSF is the ability to purchase your business premises using your SMSF.
A long standing rule of SMSFs is that all assets and transactions must be at arms-length, with extra scrutiny placed on any related-party transactions. The one exemption to this is commercial property for the SMSF holder’s business.
A small business owner can use their SMSF proceeds to purchase commercial premises for their business to operate from. The business must pay market-rate rent to the SMSF, but otherwise there are no great restrictions.
“I can do a better job myself”
Unfortunately an increasing number of people are choosing an SMSF because they believe, rightly or wrongly, that they can do a better job than the professional fund managers.
No doubt there are some very savvy DIY investors out there who will be able to outperform the fund managers, but for 95% of DIY investors it will be near impossible to outperform on a consistent basis over many years.
There is a real risk that thousands of DIY investors are going to jump into an SMSF without having the right skills, experience and time to give their SMSF the attention it deserves.
Many new SMSF holders will spend a lot of time researching investments and taking care of their fund during the first year or two, but after that many lack the commitment to continue managing their SMSF.
Unless you know you have the experience, skills, knowledge and of course time to manage your SMSF properly, it is highly recommended that you either engage the services of professional advisers, or perhaps stick with a standard retail or industry fund.
Should you choose an SMSF?
Your choice really depends on your own personal circumstances, as well as your retirement goals. If you do choose an SMSF to hold your retirement savings, make sure you are doing so for the right reasons.
If do go down the SMSF path and you plan plan on taking the DIY approach to your investment decisions, you should still seek the advice of a professional adviser from time to time to ensure you are still on track.
Taking control of your retirement savings is a great idea, regardless of whether you go with an SMSF or a standard retail of industry fund. Just make sure you know what you’re getting yourself into before making the big leap.