Money
The case for and against setting up a SMSF
If you’re financially literate, a SMSF (self-managed super fund) could be an option worth pursuing. Just be warned: there’s a lot of work involved, as Nigel Bowen explains.
By Nigel Bowen
By design, Australia’s super system is straightforward. Apart from supplying the necessary super fund details whenever we start a new job, we don’t have to do much. A percentage of your salary is automatically syphoned off to a super fund, the people running the super fund invest it on your behalf, and when retirement – or possibly semi-retirement – arrives you gain access to your nest egg.
But a small proportion of Australians don’t do things that way. Instead, they create their own super fund and – within some constraints – invest their superannuation money as they see fit.
You probably know at least someone with a self-managed super fund (SMSF). However, you probably don’t know a lot of people who’ve gone down this path.
There’s a reason for that.
The current SMSF scene
Earlier this month, the ATO published some interesting data on the state of SMSF super funds. This oveYrview included the following statistics:
- Over 625,000 SMSFs hold $990 billion in assets, with more than 1.1 million members, as at, 30 June 2024
- On average, SMSFs had assets of $1.55 million in 2022–23, up 21% over the 5 years to 30 June 2023
- 65% of SMSFs have existed for more than 10 years
- 43% of SMSFs had assets between $200,001 and $1 million (this accounts for 16% of total SMSF assets)
- The median age of SMSF members of funds established in 2022–23 was 47 – the median age of all SMSF members was 63 as at 30 June 2024.
- The average member balance for females increased by 26% over the 5 years to 2022–23, while the average balance for males increased by 22% over the same period.
To summarise – Australians tend to set up a SMSF in middle age (almost 80% of SMSF members are 50 years or older). Also, while there are undoubtedly exceptions, the available evidence suggests those who take the SMSF option are high-income earners who are financially literate and are confident they can invest their super money wisely.
There’s nothing magical about SMSFs
Many Australians take little interest in their super, at least until retirement nears, and presumably have even less interest in determining how their money gets invested during the last couple of decades of their working life.
And that’s perfectly OK – if you leave it all to the professionals you’ll (a) have a much simpler life and (b) probably get a reasonable return on your money, especially over the long term.
On average, those who have taken the default non-self-managed option which typically allocate 61-80% to growth assets, have achieved an average annual return of approximately 7.2% over the past 10 years. (But be warned, as always past performance is not necessarily indicative of future results.)
If you’ve now reassured yourself that you’re not missing out on anything by not having a SMSF, we can part company here. But if you want to know why a not-insignificant minority of Australians do choose to set up a SMSF fund, please stay with me.
The bad news
Here’s what the Federal Government has to say about SMSFs, via MoneySmart:
When you manage your own super, you put the money you would normally put in a retail or industry super fund into your own SMSF. You choose the investments and the insurance… While having control over your own super can be appealing, it's a lot of work and comes with risks. Only set up your own super fund if you're 100% committed and understand what's involved.
So, what’s involved? Oh, just the following:
Firstly, your investments might not bring the returns you hope for.
Then, if you lose your super money through theft or fraud, you won’t have access to compensation or be able to get the Australian Financial Complaints Authority (AFCA) involved.
There’s also a substantial amount of admin work involved and it has to get done regardless of whatever else is going on in your life. A 2019 ASIC report found it takes, on average, 100 hours and costs $13,900 to run a SMSF for 12 months.
(If you have a SMSF, you’ll need to devise an investment strategy, stay abreast of any changes to the investment, super and taxation rules, keep on top of the bookkeeping, and arrange an annual audit.)
Even if you consult with professionals, you are personally liable for all your SMSF’s decisions.
That’s after you’ve navigated the kind of SMSF you need: there are 3 types of SMSFs – ones for individuals, ones for couples and ones for families. (This is why there are 1.1 million Australians in an SMSF but only 610,000 SMSFs.)
While it’s not an issue with the individual variety, things can get complicated if there’s conflict between the members of a ‘group’ SMSF…
Add to all of that the fact that if you move the money you currently have in an industry or retail fund into an SMSF, you could lose the insurance that many super funds provide to their members.
The good news
At this juncture, you may be wondering why anybody would willingly shoulder the burden of running an SMSF.
The short answer is that just as some people prefer being self-employed rather than having a boss, some people want to invest their own super money rather than have other people do it on their behalf.
There are lots of upsides to leaving it all to the professionals, but it’s not a free lunch. Aside from choosing whether they want the High Growth, Growth, Balanced or Conservative investment option, members of industry and retail super funds have little to no input on how their super money gets invested. Also, super funds aren’t charities (though industry ones do operate as not-for-profit), and charge fees for the services they provide to members.
In contrast, those with a SMSF have a great deal of autonomy. They have the option of ploughing their hard-earned into almost any asset class that takes their fancy, including residential property. (No, you can’t use the money in a SMSF to buy a house for yourself or a family member. But you can buy an investment property.) They also get to choose exactly who they don’t want to invest their super with.
While there are other benefits, especially in terms of having greater flexibility around tax payments and estate planning, the main reason Australians set up SMSFs seems to be wanting greater control over their financial destiny.
But be warned, that greater control comes at a significant cost and involves taking on some serious risks. If you’re considering opening a SMSF, it’s wise to talk to a financial adviser.
This article reflects the opinions and experiences of the author and does not necessarily reflect the views of Citro. It contains general information only. It is not financial advice and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their financial circumstances, objectives and needs.
Feature image: iStock/whyframestudio
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