30 May 2016

Superannuation: Are You Ready For A Management Role?

Earlier this year, Self Managed Super Funds in Australia passed one million members across more than half a million funds.

Considering this incredible popularity, it is timely to consider just which is better to invest in, a managed fund or a self-managed fund?

The answer to that question is…”It depends.”

Sorry to sit on the fence, but there are quite a few variables to consider when weighing up the decision of whether to create your own self-managed superannuation fund. Lets look at some of the main ones.

How much money do you have to invest?

The answer to this question is a key determining factor in whether or not you should even consider a SMSF. Managed fund fees will tend to increase as the overall size of your account increases (fees should normally work out at around 0.25% to 1% of your overall balance), while SMSF’s tend to have a number of fixed fees, which work out as proportionately expensive for small balances, but decrease in proportion as your account increases. As a guide, a SMSF won’t be more economical with fees until your account passes $250,000. There other factors to consider that may offset the higher fees, but if you are just starting your career, you need to understand that the investment returns you would need to generate in order to cover those higher fees could make it unlikely that a SMSF will put more in your pocket initially.

How much do you know about investing?

One of the key points of difference between managed funds and self-managed funds is the level of control you have over your investments. Managed funds generally offer limited flexibility regarding how your money is invested (this is usually at the discretion of the fund manager). While many do provide DIY investment options, where you can at least chose the area’s that you would like to invest in, such as shares or term deposits, you won’t find the same financial freedom to choose as with a SMSF. If you don’t have much knowledge or interest in finances, a managed fund is probably a good option. For those people who take a keen interest in financial markets, and who feel that they can make investment decisions at least as successfully as a fund manager, SMSF’s provide that opportunity.

How much time do you have to invest?

In addition to needing the knowledge to invest successfully, as a SMSF trustee you are responsible for the management and administration of the fund. So between monitoring the financial markets relevant to your investments, managing the actual investment transactions, ensuring that your fund complies to all pertinent regulations and maintaining the necessary records, a SMSF can chew up a fair amount of time. Contrast this to a managed fund, where the investing is taken care of by the fund manager and your main involvement is to review the annual report to confirm you are happy with your account’s progress.

How much responsibility do you want?

By creating a SMSF, you become the trustee over that fund, which means you are fully responsible for maintaining the fund in compliance with ATO regulations. You will need to organise annual audits, keep records and prepare tax returns. Failure to comply with the Superannuation Industry (Supervision) Act of 1993 can result in a ‘notice of non-compliance’, which means your fund will no longer qualify for the concessional tax rate of 15% and will instead incur a tax rate of 45%. As you can see, failure to administer your SMSF successfully could cost you a lot of money.

Those are some of the main differences between managed superannuation funds and self managed superannuation funds, but there are others and you should do a thorough investigation of your options before making a final decision. Talk to an adviser about your personal circumstances. Don’t forget that you can use professional advisers to assist in the management of your SMSF, but it will obviously add to the costs.

Keep in mind that most of these points are relevant to being the creator of the fund and its trustee. You can join a SMSF as a member, but all fund members need to be relatives, and there is a limit of four people per fund. If you are considering making the switch and have a quarter of a million dollars or more to invest, a good understanding of investment strategies and are prepared to put in the time and accept the responsibility for your fund, you could find that joining the million plus Australians who invest in a SMSF could be a very financially rewarding experience.

By Troy MacMillan