Opinion
Should you DIY super? There are risks and rewards
Dominic Powell
Money EditorReal Money, a free weekly newsletter giving expert tips on how to save, invest and make the most of your money, is sent every Sunday. You’re reading an excerpt − sign up to get the whole newsletter in your inbox.
You’ve probably heard it numerous times, but your superannuation is one of the most important investments you’ll make in your lifetime. Other than the (fairly measly) pension, your nest egg is all that’s there to support you in the last third of your life, and having a healthy one can mean the difference between a comfortable or slightly strained retirement (not to mention a few overseas holidays).
It’s no surprise then that we pay super funds and their managers multiple millions of dollars to manage this money for us, trusting in the fact that their expertise and know-how will mean our hard-earned is well invested. And thankfully, dud funds are less common than they used to be, though they still exist here and there (use this tool to check if you’re in one).
A self-managed super fund might seem like an attractive prospect, but it is also a lot of work.Credit: Aresna Villanueva
Despite this, there exists a bustling industry – worth some $900 billion – of people opting to DIY their super. Known as self-managed super funds (SMSFs), they allow you to pick exactly how your super is invested rather than leaving it to the discretion of your super fund. They also allow you to invest your retirement savings into things super funds usually won’t touch, such as residential property and cryptocurrency.
What’s the problem?
SMSFs have grown in popularity over time, with roughly 50,000 more established since 2017, making up about one quarter of the total super sector. They can also be very lucrative investment structures, with the top ranked SMSF having a whopping $401 million in it in 2022.
However, they’re also difficult to establish and onerous to maintain, requiring you to follow a range of strict rules around your investments and reporting. They also rely on you being a savvy investor, and while a lot of SMSFs outperform standard funds, a lot don’t.
What you can do about it
Here are some things to know before diving into the world of SMSFs:
- You better work: As mentioned, SMSFs are a lot of work. They’re nothing like the relatively hands-off “standard” super system where your employer pays directly into your fund, and you basically forget about that money until retirement. “As the trustee [of your SMSF] you will need to keep excellent records and provide these to your accountant to have an annual return done, and an audit completed,” Money columnist and financial planner Paul Benson says. You are also required to ensure your fund complies with all relevant superannuation legislation, and ensure that the sole purpose of your fund is to provide retirement benefits. You can employ specialists to manage a lot of the admin side, but the liability will ultimately fall on you.
- Key person risk: In business, key person risk is a phenomenon where one person has all the knowledge, know-how, and relationships in a company, and their departure would seriously hurt the business’ operations. The same thing can happen with SMSFs, Benson says. “Where a couple has an SMSF, often one member of the couple does everything. At some point, that person will become incapable of managing the fund, and it can be challenging for their partner to then become involved if they’ve had no involvement previously,” he says. If you’re thinking about starting an SMSF, make sure all beneficiaries are across the running of the fund.
- Consider the costs: According to Choice, the average cost of running an SMSF is $6152 annually (not including insurance and investment expenses), which – for the majority of people – is more than the average super fund fee of about 1 per cent. You also need a decent chunk of change to make an SMSF worthwhile: at least $500,000 according to the corporate regulator. Any lower and your fund is more likely to underperform when compared to standard super funds.
- Think about why: There can be many benefits to having an SMSF, such as the aforementioned increased flexibility and ability to tailor your super fund to exactly your needs. They can also post great returns, and allow for a more diverse and interesting range of investments. However, they’re not for everyone, H&R Block Director of Tax Communications Mark Chapman says, and you should think carefully about if they suit your stage of life. “SMSFs are not suitable for those with low super balances and for those who aren’t prepared to invest the time and resources to make a success of their own fund,” he says. “If you’re happy with the performance of your existing fund, you may not want to change.”
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.