A recent survey by Industry super fund REST has found that of those operating self-managed super funds (SMSFs), 25% wouldn't have started one if they'd known how much work was involved.
A third also stated that their SMSF had made more money for their accountant than themselves, which is truly a pity, but could be explained as I'll show further on.
REST surveyed more than 1,000 people aged 50 and over who are yet to retire in August, with 12% reporting they had their own SMSF. The industry super fund pointed to the data and suggested that older working Australians appear to be sceptical about the benefits of SMSFs. (Alternatively, they could have concluded that 75% of those with an SMSF are happy they set one up.)
There are more than 500,000 SMSFs representing more than 1 million Australians in Australia, while there are 14 million Australians with a super account – with 45% holding more than one account, according to the latest Australian Tax Office statistics.
Many SMSF trustees also hold a super fund account to give them access to asset classes not available through a normal SMSF, as well discounted insurance products.
The fact is that running an SMSF can be as easy or as difficult as the trustee wants it to be. Several online SMSF administrators charge ultra-low fees of around $700-$800 per year, if the trustees invest in simple products like shares, term deposits and cash. But in exchange for these low fees, there is some administration work required – although some administrators automate much of the process requiring half an hour or less once a year, if it holds basic asset classes (I can attest to that – completing my end-of-year administration requirements in about 30 mins last week).
If trustees want to take a hands-off approach – then there are a few SMSF administrators who will gladly charge you $5,000 or more each year.
I suspect the administration side of things doesn't bother many people, but they struggle when it comes to actually running the super fund, making asset allocation decisions (i.e. where to invest, what stocks to buy, what percentage of the portfolio etc).
The trustee of an SMSF is in all but name a fund manager (unless they outsource that too) – and not everyone is cut out for that role. I also suspect that many trustees trade far too often, running up large brokerage bills and numbers of transactions, which can make the admin side of things complicated and time-consuming. No wonder accountants are forced to charge large fees to administer the account. Add in one or two investment properties and the complexity multiplies.
Here are some simple ways to make the most of your SMSF:
- Keep exotic investments out of the super fund
- If your accountant manages the fund for you and you're paying high fees which minimise the advantages of an SMSF, perhaps it's time you considered simplifying your SMSF and switching to a no-frills online SMSF administrator.
- If you're making more than 20 trades a year, you're probably trading too much, which will impact you through high brokerage fees and your accountant will have to spend hours working out the financial position of your SMSF and your tax position.
- By deciding to set up an SMSF, your implicit goal is to beat the performance of the professional fund managers, after their fees have been taken out. If you can't do that, you may be better off winding up the SMSF and sticking your funds in a low-cost industry super fund.
- On that note, make sure you are tracking the performance of your portfolio and compare it to an index or similar managed super fund.
- You should also have a target figure in mind at your expected retirement age. But if you assume an average annual growth rate of more than 10%, you're likely fooling (lower case 'f') yourself. If you're over 50, this recent article outlined some further steps to boost your retirement nest egg.
- If you've allocated a percentage of your portfolio to fund managers, make sure you know exactly what their performance is and what fees you are being charged.
- Likewise if you have a financial advisor. If you are paying thousands out each year in fees, are you getting the performance you wanted?
- AN SMSF is not a plaything to be used to trade speculative resources, energy or biotech stocks. Keep that for your personal portfolio outside of super if you must. Even better, stop trading and invest for the long term.
- If you're relying on an inheritance to bump up your super balance, REST's survey found the average inheritance received was around $110,000 – while those people surveyed anticipating an inheritance expected to receive $250,000 (somewhat unrealistic).
- I'm biased, but subscribe to one (or more) of the Motley Fool Australia's subscription services that tell you what stocks to buy, hold and sell – and in two services, how much of your portfolio to allocate to each stock.
Foolish takeaway
Running an SMSF doesn't have to be complicated, time-consuming or expensive – it's likely the choices trustees make that cause most of those issues. Keep it simple and you may find your SMSF thrashing the pants off the professionals.
