Self Managed Super Funds - Are they right for you?

By Geoff Coy, Certified Practising Accountant

Geoff Coy, Accountant, looks at the pros and cons of switching to a Self Managed Super Fund.

Your superannuation should be your investment for retirement.

For anyone contemplating the switch to a self managed superannuation fund (SMSF), the ATO and Australian Securities and Insurance Commission (ASIC) have developed four key points to help you decide if self managed super is the right decision for you.

The best advice is to 'Look before you leap' if you're thinking of switching. SMSFs are great for some people but they don't suit everyone.

1. The fund should be strictly for retirement benefits only

The assets in the fund are not to be run as a business or to benefit you or anyone else outside the fund.

The personal use of holiday homes, art to decorate your home, and your golf club membership almost certainly won't comply.

Also avoid illegal schemes that try to get your super money out early, and save yourself from getting cheated and from heavy tax and legal penalties. These schemes are sometimes promoted by word of mouth or shady advertising.

The ATO and ASIC will take action against those involved in illegal early access schemes. ASIC will act against those who provide unlicensed financial advice.

2. Time and skills needed to run a SMSF

The term 'self managed' means you do the work. Before you start, make sure that you've got the time to manage your own super. Many people find it hard enough to run a business let alone their super fund investments.

Additionally, legislation also says you must also work out an investment strategy. Then you must select and manage investments that will grow in value and meet your fund's investment objectives.

You must also be a trustee of your own fund. Even if you get help, you remain legally responsible. Make sure the fund has the correct structure and keep accurate records as well as meeting all the income tax and reporting requirements.

3. The benefits must exceed the cost

Some experts suggest you need between $100,000 and $200,000 in super to make the costs of a SMSF worthwhile. With less than this amount, the fund may have difficulty earning enough to make set-up and running costs worthwhile.

SMSF's can cost around $2,000 or more to administer each year. These costs can include audit, accountancy and lodgement fees.

4. Switching to a SMSF may affect your current super

Changing funds means changing benefits, services and fees. Make sure you don't leave yourself without life insurance - and compare costs.

If you can't figure it out by yourself get professional help from a licensed financial advisory business. Licensed advisers are trained to consider your personal situation and to recommend a suitable product for you. By using a licensed business, you get extra protection if anything goes wrong.

Tax agents or accountants can help you set up a SMSF. But they must not advise you about which super fund best suits you or which investments should be in your fund, unless they're also a licensed financial advisory business. (Some accountancy businesses do hold these licences, but many do not.)

How it all went wrong for Con

Con was aged 40, ran his own service station/convenience store and had a dream to retire early and travel the world.

Con was not happy with the performance of his superannuation over recent years. The super fund he had been contributing to was achieving negative returns.

Then Con saw an advertisement in the newspaper that described how he could get control of his own superannuation.

Con contacted the advertiser who appeared to be very knowledgeable. He said that Con could put the money into a self managed superannuation fund and either invest it himself or the promoter could invest it for him. There was a huge range of investment options which included property, shares, importing and selling motor cars, and his worst performer last year returned 45%. Con decided to go ahead with a self managed super fund and asked the promoter to manage the investments for him.

It was a really smooth operation. Every month Con got statements telling him how well his fund was performing. Even though the monthly administration fee was more expensive than what Con paid to his original fund it seemed the returns were worth it.

Then one day Con received a call from an investigator at ASIC who asked him about his investment and wanted him to be a witness in a prosecution against the promoter's company.

Initially, Con declined because he was getting fantastic returns on his investment. Con was later surprised when the investigator turned up at his home with the bank statements for the fund, showing how the money had gone into the account but had been withdrawn in hundred dollar amounts at the local casino. Only $550 of the original $50,000 superannuation balance was left.

It turned out the promoter had a gambling problem and he ran this scheme to fund it. As the promoter is already a bankrupt and with his gambling problem there seems little chance of Con getting any money back, even if he is convicted.

To make matters worse, the fund Con transferred out of is now getting good returns because the poor performance over a few years was due to a badly performing market.

Had Con stayed with them he would have made up the money that he originally lost and his funds would have been building again.

A few bad years of investment returns can make even the most patient investor worry that they've chosen the wrong strategy or the wrong super fund. However, if your fund is not doing worse than the overall market, it may be best to grin and bear it.

Superannuation is a long term investment which requires an investment strategy that will select and manage your investments well enough to meet your funds objectives, regardless of whether it is self managed or externally managed.