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Self-managed super – are you protected?

January 31st, 2018

Self-managed super funds (SMSF) have risen in popularity during recent decades as a growing number of Australians opt for greater control over their superannuation, and how it’s invested.

However, while SMSFs can offer more direct control over investment strategy, asset selection and portfolio management than some managed superannuation funds, they are not without risks and limitations.

Listed below are some of the biggest risks and complexities associated with SMSFs you should consider if contemplating self-managing your super.

  1. Administration and liability: with greater control comes greater responsibility. The Trustee(s) of a SMSF is/are obligated to retain records and meet reporting requirements in accordance with superannuation and taxation legislation. In fact, all Trustees have equal responsibility for fund management, irrespective of their level of active involvement in the day-to-day management of the fund. Failure to comply can have serious legal repercussions, and therefore should not be entered into lightly.
  2. Expertise: the effectiveness of an investment is dependent upon asset allocation, which takes into consideration individual investment strategy, risk appetite and other factors including legal and taxation requirements. It’s important to recognise not all assets are equal and hence do not perform the same. In fact, asset performance can vary dramatically over time, with your investment portfolio requiring ongoing monitoring and management. This can be a disincentive to the average person who has neither the experience nor interest in financial markets and asset class performance.
  3. Protections: SMSFs are not subject to the same protections from fraud, embezzlement and theft as APRA-regulated funds, making them ineligible for compensation in the event of foul play. Such was the case with the Trio Capital collapse in 2009, which witnessed losses estimated to exceed $175 million. While risk can be balanced through effective portfolio diversification, before establishing a SMSF it is critical to acknowledge and understand the implications of the potential to lose your life savings.
  4. Funds under management: according to ASIC, establishing a SMSF with a balance of less than $200,000 is likely to be disadvantageous when compared with a large managed fund due to the direct costs of establishing and managing a SMSF. Fund administration costs including annual audits, asset valuations and lodging returns, not to mention the opportunity cost associated with self-managing the fund, all have an impact on returns. Furthermore, insurance obtained through a managed fund is typically cheaper than those an individual SMSF can source directly, due to the managed fund’s wholesale or group cover. And, that’s assuming the SMSF can obtain cover at all, with life and TPD insurance often more difficult to obtain.

While a SMSF may currently offer greater flexibility, an increasing number of superannuation funds now offer DIY options with the ability to determine how funds are allocated, without the need for the onerous administration required by a SMSF.

Understanding these factors will assist you to make an informed decision when investing and managing your super.

For more information about your superannuation, as well as your rights and obligations, contact Member Services on 1300 360 988.