Is 2014 the year to set up an SMSF?
If you thought there was a significant amount of media attention on Self-managed super funds in the last year you would be right. SMSFs have definitely become a hot topic – and it seems everyone has an opinion.
In this article I will share my views on why SMSFs have now become mainstream, and whether an SMSF is suitable for you.
So what’s the big deal with SMSFs?
Show me the money!
As at 30 June 2013, there were just over 500,000 registered SMSFs, with close to 1 million members and with total assets of $506 billion.
The total value of all superannuation assets in Australia including industry and retail super funds is $1.6 trillion dollars. Ever wondered what a trillion dollars looks like?
The sheer size of the superannuation market, and especially the SMSF market, is one key reason it has gained so much attention.
The size and growth of the SMSF market has attracted the big end of town, with AMP being the first of the large institutions to try and capture market share by buying SMSF administration businesses. Other large financial institutions – including the big four banks – will be following suit soon and you will begin to see more SMSF products and services being advertised as AMP has done heavily in the last 12 months.
Compulsory super was introduced more than 20 years ago, which means most of Gen-Y has had a portion of their wages paid into superannuation for most of their working lives.
For many of us in this generation, we are starting to see a significant amount of our wealth being held in super – so once again big dollars attract our attention. It is not unusual for a couple in their 30’s to have combined super savings of over $200,000 – which again makes an SMSF an attractive choice when compared to other super funds.
Similarly, with an ever increasing number of baby boomers starting to retire, that generation are also becoming extremely focussed on their retirement savings, and are seeking the control and transparency SMSFs can provide.
Although SMSFs have been able to utilise borrowings to purchase property for more than five years, it wasn’t until September this year that the strategy became a media and political football with virtually every party with a vested interest being extremely vocal.
Gearing of property within SMSFs was labelled as the next big financial services train wreck, while it was also apparently responsible for creating a housing price bubble. Both of these statements are great to sell newspapers, but are not based on fact.
Geared property within SMSF make up less than 0.5% of total investments (0.4848%). Most property held by SMSFs is still commercial property worth a total of $58 billion (11.4%) with a smaller about of residential property at $17 billion (3.4%).
So even though the take up of geared property in SMSFs is still comparatively small, there is a rogue element within the pseudo-advice market who is heavily promoting low quality properties to investors.
These spruikers are using the same old tricks – but now potential SMSF trustees are their target. I received an email just the other day informing me I could earn 20% commission by referring my clients and newsletter subscribers to a specific property development and marketing company!
So although the statistics don’t justify the media coverage directed at SMSFs in regards to geared property investment, it may be a contributing factor to the growth of SMSFs as it brings them into the spotlight.
Is an SMSF for you?
How much is enough?
Over the years I have heard ‘experts’ say that you need anywhere from $50,000 to $1 million dollars before setting up an SMSF. ASIC and the ATO say at least $200,000 – however these figures are based on the flawed theory that an SMSF is comparable with an industry or retail fund – so they are comparing apples with oranges.
I discuss this subject in a lot more detail in this article: How much is needed to set up an SMSF?
Although the article was one of the first I published way back in 2010, the information is still extremely relevant.
Most SMSF trustees I work with are more than willing to pay a premium for the flexibility an SMSF can provide, however in most cases an SMSF can work out significantly cheaper.
Control, control, control
All of the research conducted into why people make the decision to establish an SMSF comes down to control, with choice / flexibility of investments coming in second.
But what does control actually mean?
When it comes to SMSFs, control means different things to different people. For some it means researching investments and putting implementing an investment strategy. For others it is more about working closely with a professional adviser who can deliver a customised wealth creation plan that suits their lifestyle and helps them to achieve their goals.
Control for a small business owner may also mean purchasing their business premises in their SMSF, giving them control and stability over their tenancy.
The myth about onerous SMSF responsibilities
When you establish and run an SMSF you do take on responsibilities. This aspect however is frequently blown out of proportion in terms of the time required to actually manage an SMSF ongoing once it is set up.
The wording typically published brings to mind images of a frustrated looking middle-aged man being overwhelmed by piles of investment research and paperwork with the big bad ATO looking over his shoulder. This couldn’t be further from the truth – provided you work with professionals who know what they are doing.
Historically that professional would be your friendly suburban accountant; however this is changing as technology streamlines virtually every aspect of operating an SMSF.
The biggest friend to an SMSF trustee in 2014 is an iPad (or other tablet pc).
Less and less time should be spent on ‘paperwork’ and compliance related activities, with more on education around investments and strategies – which is the most important, and probably the most interesting aspect of running an SMSF.
I know that within my business (Superfund Partners) we have many clients who once their SMSF is set up, the ongoing management is entirely paperless: Banking and investing is all handled online, communication with us as their administrators and strategic advisors is electronic (when not in person), all the accounting and tax returns are completed electronically (in Australia) and anything that needs to be signed can typically be securely signed electronically as well!
The ATO has some very good quality, well written publications on what you need to think about and what your responsibilities are when setting up and operating a SMSF: http://www.ato.gov.au/Super/Self-managed-super-funds/
The big question
Control is definitely a key motivating factor, but it’s more about having a deeper engagement with your overall savings and wealth creation – both inside and outside of the super environment.
The SMSF trustees I work with have taken responsibility of their personal finances. They are not going to rely on the Government, their employer or their family / spouse to secure their future lifestyle.
And this to me is the key question when deciding whether an SMSF is right for you:
Do you want to actively take control of your overall personal wealth creation?
If the answer is yes, then an SMSF may be for you.
If the answer is no, then there is nothing wrong with leaving it in an industry or retail super provided (although you may want to move out of the default ‘balanced’ investment strategy to maximise your long term returns).
SMSFs can be a great enabler when it comes to personal wealth creation provided you do your research, trust your instincts and work with professionals who are there to help you.