SMSFs are more expensive to run than first thought: Mark Bouris

The release of a report this week shows self-managed superannuation funds (SMSFs) are more expensive to run than once thought.

The Rice Warner report into SMSFs found that if you have $500,000 and more in a self managed fund, it is cost-competitive with public funds, but if you have between $200,000 and $500,000 in assets, the financial viability depends on how much administration work you can do yourself and whether you need advice in investing.

The costs that large funds spread across thousands of members and billions of dollars have to be met by each SMSF. They include annual audits, tax lodgements, investment arrangements, advice, administration and legal costs.

SMSFs are favoured by professionals and business owners who are confident with financial responsibility, want control over their wealth and typically want direct ownership of property. SMSFs are also popular with retirees who take an active interest in running their affairs.

One third of all Australian superannuation assets are held in these funds.

However, control is one thing: you also have to make sufficient returns to live in retirement. If your fund costs are greater than your returns, you are not doing yourself any favours.

Luckily, there are other ways of gaining control of super while avoiding the headache of SMSFs.

For a start, you could ensure that you understand every option in your current fund’s portfolio. Control can start with becoming informed about which particular investment option you should be in.

If the choices aren’t there, look around: many public superannuation funds now offer options such as cash, term deposits and direct shares. So people may be going to the extra cost of establishing an SMSF when their preferred options are available in a public fund.

One of the real advantages of an SMSF is the access you get to direct property. Recent rule changes allow superannuation funds to borrow to buy property which has seen property promoters push SMSFs as a way of buying property. However, superannuation is just a tax structure. The investment decision must still follow fundamentals: does this investment give you the required income in retirement?

For conservative retirement savers, taking more control outside an SMSF could involve public products that invest in cash and bonds, to give a similar risk profile to cash but a higher return.

I mention this because around 29% of all SMSF investments are held in cash, even though conservative retirement savers can find security in a retail environment without having to administer their own super fund.

And don’t forget to calculate the insurance benefits in a public fund. Generally the life and TPD premiums are lower in a super fund than can be sourced through a SMSF.

A final word: in the end, super assets must compound in value and (after fees) at least outstrip inflation. If you want to be in a self-managed fund, you must ensure that the costs don’t inhibit the point of the exercise, which was to have enough money to live well in retirement.

You can contact Mark on Twitter.