Traditional super funds have been offering mixed performances in recent times. The best average return over three years according to SuperRatings is just over 8%, by FSS Health Super Division, which is not very high for the best. The median performance of a benchmark of 50 major funds is rating at 5.1% over three years and 4.7% over 10 years. You could get a better rate by just putting your money in term deposits. Many Australians are fed up with their super and this is reflected in the strong growth of the self-managed super fund (SMSF) industry. SMSFs have been growing at a compound rate of 25% each year since 1994. In September 2011, there were more than 450,000 SMSFs in Australia, containing over $397 billion in retirement assets. Self-managing your super may well be the way of the future, so why not start now?
Setting up an SMSF is considered a viable option by those in the industry only if you have accumulated around $300,000 or more in your regular super. This is because superannuation management companies charge more than $3,000 a year on average in administration, to make sure you comply with strict tax rules and investment regulations. Unless you have more than $300,000 in super, the administration costs are more expensive than the average 1% management rate charged by regular funds. The good news is that as your SMSF balance increases, the management costs do not increase as they would in a regular fund. The more you have in super, the more you save in administration by having an SMSF.
Some people choose to set up an SMSF despite having considerably less than $300,000 in their super. This is because they see value in being able to access what super they have to invest in something that they see as a great opportunity, without having to raise the money required in their everyday life. They are also attracted by a tax rate of 15% on returns within super, instead of up to 46% on the outside.
A cheaper alternative
Recently, online SMSF companies are beginning to emerge that take care of your compliance for far less. These include E Superfund, Evolve My Super, Superannuation Warehouse and RaboDirect and offer you full compliance work, as well as access to loan and investment products, for as low as $699 a year, not including the ATO’s $180 annual levy. This means you can have less than $100,000 in your super and still benefit from an SMSF with cheaper running costs.
Establishing an SMSF online saves you from pursuing multiple administrative avenues, because you are mailed all the forms and information you need to take care of compliance.
“[These companies have] positioned themselves very well, in terms of low costs and a simple model,” says Kris Kitto, SMSF specialist advisor, Super Fund Partners. “It is predominantly for people who want direct share investments and works well on the surface because it keeps costs down.”
However, the cheaper online option comes with less choice for trustees, who are required to use specific lenders and trading platforms.
“One of the reasons E Superfund can do it for $699 per annum is they do receive some commissions and bonuses back from ANZ and also CommSec for the shares,” Kitto says.
If you have no problem with such restrictions, an online SMSF set up might be the right option for you. However, you should remember that although more expensive, regular superannuation managers factor financial advice into their yearly fees. They are qualified financial professionals that can guide you in your investment decisions and keep an eye on your activities to make sure you are not in danger of legal or tax breaches.
On the other hand, a cheaper online company offers no advice. The only contact you will have with such a company is through snail mail and online forms. When it comes to making investment decisions you are well and truly on your own.
“If you know the laws and know the ins and outs of limited recourse borrowing, there’s no reason not to use [an online service],’ says Kitto. “A lot of advisers are positioned at the other end of the service scale. We provide a full service package and see trustees right through from the establishment of the super fund to settlement of the property and other investments.”
An online application can take as little as five minutes, after which you are mailed an establishment package, containing forms that you fill in and send back. The company then registers your SMSF and you are responsible for applying to your existing super fund to roll over your benefits. Once this has happened, you can start investing. If you want to find out how much you can borrow, use our SMSF calculator.
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