A self-managed super fund (SMSF) is a super private fund that you manage yourself. SMSFs are different to industry and retail super funds.
When you manage your own super, you put the money you would typically put in a retail or industry super fund into your SMSF. You choose the investments and the insurance.
Your SMSF can have up to four members, who are friends or family. Most SMSFs have two or more. As a member, you are a trustee of the fund — or you can get a corporate trustee. In either case, you are responsible for the fund.
While having control over your super can be appealing, it’s a lot of work and comes with risk.
Only set up your super fund if you’re 100% committed and understand what’s involved.
The risks and responsibilities of SMSFs
All members of an SMSF are responsible for the fund’s decisions and for complying with the law.
These responsibilities come with risks:
- You are personally liable for all the fund’s decisions — even if you get help from a professional or if another member made the decision.
- Your investments may not bring the returns you expect.
- You are responsible for managing the fund even if your circumstances change — for example if you lose your job.
- There may be a negative impact on your SMSF if there is a relationship breakdown between members or a member dies or becomes ill.
- If you lose money through theft or fraud, you won’t have access to any special compensation schemes or the Superannuation Complaints Tribunal.
- You could lose insurance if you’re moving from an industry or retail super fund to an SMSF. See consolidating super funds.
What’s involved with an SMSF
The Australian Taxation Office (ATO) explains your responsibilities.
SMSFs take time and money.
Managing an SMSF is a lot of work. Even if you get professional help, it’s time-consuming.
You need enough time to set up the fund and time to manage ongoing activities, such as:
- researching investments
- setting and following an investment strategy
- accounting, keeping records, and arranging an audit each year by an approved SMSF auditor
SMSF trustees spend on average eight hours a month to manage an SMSF. That’s more than 100 hours a year. (Source: SMSF Investor Report, April 2019, Investment Trends)
You don’t have to set up an SMSF to choose your investments.
The set-up and running costs can be high. Ongoing costs include:
- tax advice
- legal advice
- financial advice
In 2018, the average operating cost of running an SMSF was $6,152. The median price was $3,923. (Source: Self-managed super funds: a statistical overview 2017–18, Australian Taxation Office, Table 25: Expenses. This includes deductible and non-deductible expenses reported at the following SMSF annual return labels: approved auditor fee, management and administration expenses, other amounts and SMSF supervisory levy. It does not include costs such as investment expenses and insurance premiums.)
You need financial and legal knowledge.
You need the financial and legal knowledge and skills to:
- understand different investment markets, and build and manage a diversified portfolio
- set and execute an investment strategy that meets your risk tolerance and retirement needs
- comply with tax, super and investment regulations and laws
- organise insurance for fund members
Be wary of anyone who offers to set up an SMSF to withdraw your super to pay off debts. It’s illegal. See superannuation scams.
On average, SMSFs haven’t beaten APRA-regulated funds
Historically SMSFs have not performed as well as retail or industry super funds, also known as ‘APRA-regulated funds’ (APRA is the Australian Prudential Regulation Authority).
APRA-regulated funds use highly skilled professionals to manage their investments. You need to be confident that the investments you choose will perform better.
The table below compares the average returns for SMSFs with APRA-regulated super funds over five years. On average, APRA-regulated super funds achieved higher returns than SMSFs.
Your balance determines the returns you can expect from your SMSF. If your credit is more than $500,000, you may get returns that are competitive with APRA-regulated funds.
If you want to set up an SMSF
If you are 100% sure about managing your super fund, start researching investment options and consider getting professional advice.
Research your investment options
Part of the appeal of an SMSF is controlling and having access to a broader range of investments.
However, there are some stringent rules about what you can invest your super in. Check restrictions on investments on the ATO website.
Set up your SMSF
The self-managed super fund’s section of the ATO website is a great resource. It explains what you need to do to set up your fund and to comply with regulations. The ATO regulates all SMSFs.
Because everyone’s situation is different, it’s always best to get financial advice before deciding or any investments. You can get independent advice from a licensed financial adviser.
Types of super funds
When you start a job, you can usually choose a super fund or let your employer choose.
Understanding the basics can help you work out what kind of account you get and whether it’s right for you.
If you want to choose your own — or change your account — there are lots of options.
Most funds offer a simple, low-fee option, called a MySuper account. This is the default account your employer will use.
Types of super funds
In an accumulation fund, your money grows or ‘accumulates’ over time.
Your super’s value depends on the money you and your employers put in (known as super contributions) and on the investment return generated by the fund.
Defined benefit funds
Your retirement benefit is determined by formula instead of being based on investment return in a defined benefit fund.
Most defined benefit funds are corporate or public sector funds. Many are now closed to new members.
Typically, your benefit is calculated using:
- the money put in by you and your employer
- your average salary over the last few years before you retire
- the number of years you worked for your employer
If you’re thinking about leaving a defined benefit fund, get professional advice. Some funds are very generous, so make sure you’ll be better off. If you go, you can’t rejoin.
MySuper is a type of account you can have with a super fund.
It’s the default account that your employer will pay your super into unless you choose a different option.
MySuper accounts typically offer:
- lower fees
- simple features — so you don’t pay for services you don’t need
- either a ‘single diversified’ or a ‘lifecycle’ investment option
Compare MySuper fund options to find the best one for you.
Even if you’ve already chosen a super investment option within your existing fund, you can choose to move to a MySuper option.
Most super funds fall into one of the following categories: retail, industry, public sector or corporate.
Retail super funds
Banks or investment companies usually run retail funds. Anyone can join.
- They often have a wide range of investment options.
- They may be recommended by financial advisers who could be getting paid fees and commissions.
- Most range from medium to high cost, but many offer a low-cost or MySuper alternative.
- The company that owns the fund aims to keep some profit.
Industry super funds
Anyone can join the more significant industry funds. Smaller funds may only be open to people working in a particular industry, for example, health.
- Most industry funds are accumulation funds. A few older funds still have defined benefit members.
- They generally range from low to medium cost, and most offer MySuper accounts.
- They are not-for-profit funds, which means profits are put back into the fund.
Public sector super funds
Public sector funds are for government employees.
- Some employers contribute more than the 9.5% minimum.
- They usually have a modest range of investment choices.
- Newer members are usually in an accumulation fund. Many long-term members have defined benefits.
- They generally have meagre fees, and some offer MySuper accounts.
- Profits are put back into the fund.
Corporate super funds
An employer arranges a corporate fund for their employees.
Some large companies operate a corporate fund under a board of trustees who they appoint. Other corporate funds are used by a retail or industry fund but are only available to its employees.
- Those managed by an enormous fund may offer a broader range of investment options.
- Some older corporate funds have defined benefit members, but most others are accumulation funds.
- They are generally low to medium cost funds for large employers but maybe a high cost for small employers.
- Corporate funds run by the employer or an industry fund will usually return all profits to members. Those run by retail funds will keep some profits.
Self-managed super funds
Recent Australian Tax Office statistics reveal that establishing self-managed superannuation funds (SMSFs) in the 2017-18 financial year (25,034) was the lowest in more than a decade. Even allowing for wind-ups of existing funds, 2017-18 experienced the lowest growth in SMSFs since 2012 (14,505 net increase in funds).
So what’s going on?
Well, SMSFs are still growing in number, but they’re just not growing as fast. With 1.1 million SMSF members out of a total population of 25 million, at some stage, we will reach a saturation point.
As much as 91.5 per cent of portfolio returns are determined by asset allocation decisions, far less from individual investment selection.
Also, recent lousy press about high-fee SMSFs with small balances, endemic issues with SMSF advice and increased regulatory focus on leveraged property investments have removed some SMSF gloss.
What does this all mean for you? My advice is to do nothing rash, take stock and re-evaluate your SMSF. I’m a big fan of reducing complexity in your SMSF.
The medieval philosopher William of Occam established the principle that of two equivalent explanations, all other things being equal, the simpler one is preferred. We know this as “Occam’s razor”.
When you take control of your family’s financial future with an SMSF, cut through complexity to meet your retirement goals. You should seek to simplify your structure, simplify your fees, simplify your investments and simplify your service providers.
Roughly 93 per cent of SMSFs have one or two members where the focus is you and your partner. Four-member funds have fallen since 2012, while three-member funds have remained stable. Ignore the hype of six-member funds; it’s a solution looking for a problem.
The royal commission has taught us to be on top of fees. Fees for dead people, fees for no service, commission-driven behaviour – sadly, we saw it all. So know what you are paying, to whom and for what benefit.
For shares and exchange-traded funds (ETF), keep track of brokerage costs. For managed funds, keep track of high fees.
If your SMSF is on a platform, compare the cash and term deposit interest rates with market rates. A low-interest rate is just another hidden fee. Media add to SMSF fees and complexity while making your adviser’s job easier. Why pay for this privilege?
Whichever way you choose to pay your adviser (commissions, percentage of assets, hourly fees), know the actual cost. In my opinion, a fixed price agreed upon each year is simple and transparent.
Warren Buffett advises us to “avoid businesses whose futures you can’t evaluate”. In your SMSF, stick to investments you understand that fit within your investment strategy and asset allocation.
A laundry list of 20 to 30 stocks (or more) can bury you under a mountain of complex paperwork, adding nothing. If you cannot explain the rationale for any single investment, then wield the razor.
A well-known study by Brinson, Singer and Beebower (1991) showed that, on average, 91.5 per cent of portfolio returns are determined by asset allocation decisions, while less than 5 per cent of returns come from individual investment selection. So dedicate most effort to your asset allocation.
Some 150 years after William of Occam, the genius Leonardo da Vinci improved “Occam’s razor” with his view that “simplicity is the ultimate sophistication”. That’s how I view ETFs.
SMSFs were early adopters of ETFs as beautifully simple investment tools focused on asset allocation. Low cost and liquid with instant diversification, they simplify paperwork and reduce your investments.
Simplify your SMSF by working with expert service providers who genuinely add value. By simplifying your SMSF, you streamline the financial accounts and reduce your accounting and audit fees.
Six hundred years after William of Occam, another genius, Albert Einstein, argued that we should “make everything as simple as possible, but not simpler”.
Undoubtedly some readers will have more complex situations where simplification is brutal. You should seek expert SMSF advice. We also know that the rules governing SMSFs are complex, bureaucratic and ever-changing, regardless of who rules in Canberra. So some complexity will always remain.
You should never lose sight of your goal to support your dream lifestyle in retirement. Continually ask yourself: “What adds unnecessary complexity in my SMSF, and do I need it?”