16 September 2009

Dear Investor,

Should I have my own superfund?

Interestingly in March 2009, there was nearly $330 billion invested in Self Managed Super Funds (“SMSFs”), representing about 32% of the whole superannuation industry's investments.  It's the largest sector of the superannuation industry.  Interestingly, the value of corporate, industry, retail and public sector funds fell by an average of 15% from March 2008 to March 2009.  The value of SMSF fell by only 4% over the same period, which probably reflects the types of investments made within an SMSF (more in direct property and cash and less in shares).  With over 400,000 SMSFs in Australia, it could be time to ask – would an SMSF be suitable for me?

What is an SMSF?

An SMSF is a specialised superannuation trust that can be established for up to four people for the sole purpose of providing retirement benefits to its members.  In other words, it’s your own super fund.

An SMSF needs to have:

  • A trust deed.  This establishes what the fund can or can't do.  An SMSF trust deed needs to be reviewed regularly to make sure that it is kept up-to-date.
  • A trustee.  All members of the fund have to be trustees.  You can act as individual trustees i.e. in your name, or appoint a company as a trustee, in which case all members need to be directors. You will need professional advice as to which is suitable for you.
  • An investment strategy.  This sets out how the SMSF will invest and addresses risk, return, diversification, liquidity, cash flow, asset allocation and the ability to discharge existing and prospective liabilities.  Again, this is an area where you should probably get professional advice from a trusted financial advisor.

Under the superannuation 'choice of fund' legislation, the majority of people can request their employer to pay contributions into their own SMSF.

What's involved in setting up and running an SMSF?

It is reasonably simple to set up your own SMSF.  Your professional advisor can help you here, or you can do it yourself.

If you have decided to have a company as trustee, all you need to do is establish the company to be the trustee and buy an SMSF trust deed.  This normally costs around $800 to $1,500 and takes about one week.  There are many businesses that sell SMSF trust deeds.  You need a deed that is fully up-to-date with the laws and that provides maximum flexibility.  For example, the deed should permit the fund to borrow.  Then you will need to apply for a Tax File Number and an Australian Business Number, and you will have to establish a bank account in the fund's name.  Once all this has been done, you might like to roll over your existing super accounts into your new fund and change your payroll details, so that your employer can contribute into the new fund.  You will need to appoint an accountant and auditor (probably from the same firm) to prepare your SMSF accounts, tax return and audit every year.

Once your SMSF has been established, you need to manage it and its investments, and in particular, keep proper records of all transactions.  This will be essential if your SMSF is ever audited by the Tax Office.

At least in the beginning, you should probably be guided by professional advice, whether from your financial advisor or your accountant


Two major benefits

There are two main benefits to consider in establishing an SMSF:

  1. Cost

SMSFs can be very cost effective, but it really depends on the type of investments you hold and how frequently you change those investments.  An SMSF will cost in the range of $1,500 to $2,500 each year to 'maintain'.  Therefore, if you have $250,000 in your SMSF, the total maintenance cost is in the range of 0.60% to 1.00% which, depending on the investment strategy of your SMSF can very cost effective.  One particular aspect of having your own SMSF is that there are a number of fixed costs that don’t increase depending on the size of your fund.  For example, the cost of auditing your fund and preparing the fund’s tax return will probably be the same, whether you have $250,000 or $2.5 million.

The key here is to compare the costs of different strategies – whether an SMSF, an industry superannuation fund, or a retail superannuation fund.  You have to do the homework, together with your financial advisor.

  1. Control

With your own SMSF you have control, subject to the fund’s investment strategy and the technical rules about SMSF investments, over what you invest in, when you invest and when you change your investments.

Whether this level of control is for you, only you, together with your financial advisor, can decide.  Some people feel more comfortable being able to control their superannuation investments.  For others, they would prefer to have their investments professionally managed.

If you have the experience, knowledge and confidence to manage your SMSF’s investments, then having your own SMSF can be a rewarding challenge.

When to use? Not for everyone

An SMSF can be an appropriate vehicle if you want the flexibility to manage your superannuation investments directly.

However, having an SMSF is not for everyone, and using an industry superannuation fund or a retail superannuation fund can provide you with sufficient flexibility and cost-effectiveness.  It’s your choice.

Strategic advice is critical

Most people don’t have the skills and experience necessary to set up and manage an SMSF on their own.  This is where strategic financial advice is critical.  Find a trusted financial advisor and talk with them.  With his or her help, you can decide whether an SMSF is suitable for you.


Best regards,
Chris Andrews

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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
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