The whys of poor super funds performance always boil down to one reason and mostly one reason alone: the fees are too high.
While it’s a good idea to have your super managed by a fund if you don’t have the time nor the expertise to manage it, staying in control of your super money gives you certain leverages to build your super faster and potentially earn better.
There are pros and cons, for sure. In Australia though, high fees for super funds can set you back at least two years’ worth of salary. Another research reveals high fees could make you poorer by $200,000 by the time you retire. But that is not the extent of the problem.
As said by the Productivity Commission, poor super funds performance persists because of the structural flaws of the super system.
Default funds arrangements, redundant fees, and insurance premiums for multiple super accounts are all likely to eat away your retirement fund.
With about 5 million super accounts underperforming, damage to super income is “nigh impossible to overstate,” the Commission said.
Not including substandard management, all these account for why some super funds performance are well below average.
Self managed super fund
A Self Managed Super Fund (SMSF) is a personalized superannuation or retirement fund that you can choose to manage yourself rather than relying on a third-party provider.
It allows you to create your own investment portfolio and make strategic decisions about how the money is used with the overall goal of generating a healthy income during retirement.
You are responsible for managing contributions, investments, administration and compliance duties, but you are also able to maximize your tax savings while creating a retirement income stream tailored to suit your needs.
Many individuals decide to form an SMSF in order to have greater control and flexibility over their hard-earned retirement funds.
Requirements of a SMSF
The only reason to keep up an SMSF is to give its members benefits when they retire. Let’s see some requirements of self managed super fund.
- Investments must be made with the goal of getting a good rate of return, not for personal or lifestyle reasons.
- There can’t be more than six people in an SMSF.
- Everyone must be a trustee.
- If your SMSF has only one member, you must choose a company as trustee or a second person to act as an individual trustee.
- No fund member can work for another fund member unless the two members are related.
- No SMSF trustee of the fund can get paid for their work as trustee.
- An SMSF can’t lend money to a member or help them out financially. An SMSF also can’t buy an asset from a member of the fund or anyone related to the trustee, except for listed shares, managed funds, and business real estate.
- SMSFs are generally not allowed to borrow money unless it complies with Limited Recourse Borrowing Arrangement (LRBA) provisions.
The trustees of a self-managed super fund have to write down the fund’s goals and come up with an investment strategy to show how those goals will be met. This must be put in writing and looked at often.
Contributions and rollovers
According to ATO ( Australian Taxation Office), a trustee of an SMSF can accept contributions and rollovers from different sources for its members. However, there are some limits, mostly based on the age of the member and the contribution caps.
You must keep accurate records of contributions and rollovers, including the amount, type, and breakdown of their parts, and add them to the members’ accounts within 28 days of the end of the month in which you received them.
As a trustee, it will be up to you to come up with and carry out your own investment plan, which needs to bring in enough money to pay for your retirement.
This means you need to know how investment markets, such as stock markets, work. Keep track of your investments and transactions, and make sure your fund is diversified enough to help you deal with risk.
Advantages of self-managed super fund.
- Control over investment decisions: With a self-managed super fund (SMSF), you have the ability to make your own investment decisions, giving you greater control over your retirement savings. This allows you to tailor your investments to your specific needs and goals, and can give you a higher level of confidence in your retirement savings strategy.
- Flexibility: SMSFs offer a high degree of flexibility, allowing you to invest in a wide range of assets, including property, shares, and cash. This can provide a diversified portfolio, which can potentially help to minimize risk and increase returns.
- Potential tax benefits: SMSFs can offer a range of tax benefits, including access to the lower capital gains tax rate and the ability to claim deductions for some expenses. This can help to increase the overall returns of your fund.
- Family and estate planning: SMSFs can be used to benefit family members, including children and grandchildren, and can also be used as part of an overall estate planning strategy. This can help to ensure that your assets are passed on to your loved ones in the most tax-effective way possible.
- Cost savings: SMSFs can be cost-effective, as you are only paying for the costs associated with running the fund, rather than paying for the services of a professional fund manager. This can help to increase the overall returns of your fund over time. A licensed financial adviser will look at your situation and give you advice that fits your financial needs.
Disadvantages of self-managed super fund
- You have to follow legal, compliance, and taxation rules, or you could get fined a lot or go to court.
- It can be hard to keep up and take a lot of time, especially when it comes to administration and reporting.
- You need to know about the business, and it can be hard to keep track of your own investments. You might not get the returns you need to be able to retire.
- There is no compensation plan like there is with other super funds to protect you from theft or fraud.
- Hiring professionals to take care of it can be expensive, especially if your account balance is low.
How to compare super funds
It’s not enough to just look for a super fund with the lowest fees and call it a day. If you are going to compare super funds performance and check out the fees, make sure you also compare the investment return periods as well as the schedule of fees. In other words, don’t compare apples with oranges.
In general, you can compare the following:
- Investment options
Fees. Check out the rate and how often you would be charged. Comparing the fees of super with an annual payment schedule with another super with a 5-year payment schedule, concurrent with an investment period of five years, for example, would be a mistake.
Also, read the fine print and check all fees they’re charging. Aside from admin fees, your super fund may also charge for investment fees, advice fees, buy and sell spread fees, investment managers’ fees, and more.
Investment options. Go with super funds that offer investment options you’re comfortable with or choose one that offers self-directed investment options so you’ll have better control of your super investment.
Insurance. Take a look at insurance offers and fees for each. Most super funds have default insurance included, but if yours provide options, choose the coverage according to what you only actually need.
Benefits. Are there any extra benefits they are offering?
Performance. Experts agree that super funds performance is best measured with a data of at least 5 years. It’s a mistake to simply pick the best super fund from the previous year.
Compare super funds performance after fees and tax. It’s also good to remember that past performance is not a reliable indicator of future performance and that no one can accurately predict how an investment will perform.
You should also weigh the benefit of choosing a super fund with low fees but also have low investment returns for long periods. For more information you should seek professional advice .
Is it time you manage your own super?
Is SMSF the solution to unsatisfactory super funds performance? Only you can answer that.
While there are no admin fees, you’d have to consider the cost of compliance and audit as all these will eat into your super returns, particularly if your balance is too low.
Also, while you’re at it, it would also be worthy to check out the super rate and threshold as set by the ATO. Whatever you do, remember that there is a wisdom to consulting with a professional.
With a Self- Managed Super Funds, you don’t have to pay fees to super funds. But, if you don’t have a strong understanding of investment risks, it’s best to hire a financial adviser to help you maximise your SMSF returns and take advantage of every available tool to grow it.