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Self Managed Super Fund (SMSF) Article
Avalanche of Super Choice of Adverts on the Way
By Tony Negline.
This article may be out of date.
2nd February 2005
The Choice of Super Fund tidal wave will hit everyone involved in the super industry over the next six months.
Many column inches describing how employees should judge their current super arrangements will fill up the print media. Lots of assistance will be provided on how to work out if a super fund is suitable for an investor.
There will be lots of every type of advertising from all manner of super funds helping us to choose a fund. The government will also get into the act with helpful unbiased advertising.
There is a good chance that by 1 July you will be driven crazy hearing about what, how, why and when of super choice.
Perhaps in a couple of year’s time a popular infomercial TV show will have a range of experts fixing a poor investor’s badly performing super funds. Our love affair with residential property has given us Backyard Blitz and Renovation Rescue. Maybe Choice of Super Fund will give us The Super Sleuths – a program that introduces the obligatory average Aussie down on their financial luck but by the end of the show their financial affairs are all spick and span thanks to our intrepid specialists. (Anyone interested in developing this concept further is welcome to contact me!)
Recent research shows we’re not too keen on our ability to choose a good super fund. Research conducted in November 2004 by Hesta – the Health Employees Superannuation Trust of Australia - revealed that forty-five percent of those surveyed know that the Choice regime will commence on 1 July this year. Not a great result. It would be interesting to see what this figure will be once July rolls around.
The same survey reveals that eighty two percent of people expect that their ability to choose a super fund will benefit them when they retire. We might not put too much store in our ability to understand super but clearly we are all keen to have some say in how our own money is invested. When you think about it, this is not very surprising.
The results of this Hesta survey however need to be carefully interpreted because the survey is not representative of the Australian population. Seventy percent of survey participants were women whereas only fifty-one percent of Australia’s population are women.
It is expected that in the early years of the Choice of Fund environment most employees will not do anything for a few years. It is also expected that most employees who do move will set up their own Self Managed Super Fund.
But what sort of person would want to set up a SMSF? Are SMSFs only cost effective for investors with substantial super assets? Is the cost of running a SMSF the most important consideration?
The cost of any investment is important. And it is common to see arguments that SMSFs should only be for investors with super assets of more than a specific dollar value. The size of this dollar value varies – some say, $100,000, others say $250,000. The argument is that SMSF with assets under this dollar value are too costly compared to other super investments.
Others argue this issue another way. In their view someone with super assets more than a particular amount, say $300,000, should have a SMSF because of the tax, investment, estate planning benefits this structure offers to retirees.
Commonly SMSF administration cost varies between $500 and $2,000 per annum. Some administrators charge a percentage of assets. Others charge a minimum fee and then additional costs as soon as the number of transactions exceed a pre-determined number.
A lot of accountants charge a minimum amount for SMSF administration, tax and audit work and increase the fees for running a client’s company or family trust to make up the difference.
The cost of other professionals also needs to be added into any comparison.
It is very hard to compare the costs of a SMSF with other types of super funds like multi-manager wrap accounts. The variability of costs in administering SMSFs makes it difficult for anyone to construct any fee comparison. It is also very hard to work out how much public super funds charge – there are often layers of administration expenses and also layers of investment management costs.
There are at least eight main reasons an investor will choose a SMSF – estate planning, investment flexibility, personal control, disenchantment with public super funds, cost, tax planning, advice and popularity.
Running a SMSF is a bit like owning your own home. If you don’t spend time maintaining your home, it will fall down. A SMSF is no different. If you don’t spend time looking after your fund and doing what the law requires, it will fall apart and you might get fined or gaoled in the process.
Research has shown that owning your own home is not necessarily the smartest decision an investor will ever make. This hasn’t stopped most Australians owning their home. For some investors running a SMSF won’t be the cheapest super option for them. This isn’t too much of a concern for them because they set up their own super fund for some other purpose.
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