Running your own super fund is not necessarily a difficult task (although recent changes to the super laws have made it more challenging), but you need to keep your wits about you. You may hear a lot a noise about DIY super, and sometimes from people who know nothing about super. Your best defence against bad advice is to start with your own research.
The term, DIY super fund, is a nickname for what is officially known as a self-managed superannuation fund (SMSF). A SMSF must have fewer than five members, and the SMSF trustees (trustees are usually also the members of the fund), although the federal government is proposing to expand the number of SMSF members/trustees to six.
SMSF trustees must keep financial and compliance records, and they must report annually to the Australian Taxation Office (ATO), and in some instances more frequently. The ATO keeps a vigilant eye on super proceedings to ensure SMSFs stay on the right side of the super laws.
Assuming you have fund choice, setting up an SMSF is one of your super options. For a quick summary of the different types of super funds, see SuperGuide article Comparing super funds: Who’s who in the super zoo?.
Note: You can also choose another type of DIY super fund, known as a small APRA fund although it’s a less popular option. A professional trustee runs a small APRA fund, and the Australian Prudential Regulation Authority regulates the professional trustee and fund. This type of DIY super fund costs more than an SMSF, because you have to pay trustee fees, although the trustee fee usually includes any administration and compliance costs.
Attracting the independent investors
Running an SMSF gives you control over where your super money is invested, and access to a greater choice of direct investments compared to managed super funds, such as retail or industry funds. As an SMSF trustee, you can invest in direct property, artwork and virtually any valuable asset. You can even purchase business property, such as an office, and use the property in your business (for a snapshot of how SMSF trustees invest, see SuperGuide article SMSF investment: What assets do DIY super trustees prefer?).
Before you get too excited about the positives of running an SMSF, you need to ask yourself three key questions:
- Are you into commitment? For an idea of what is involved when running a SMSF, keep on reading this article.
- Are you familiar with investing?
- Do you have lots of money, that is, superannuation money?
These questions may sound like an interview for a matchmaking agency but running a SMSF is a serious commitment, just like any long-term relationship. After all, you may be running your fund for more than 50 years – longer than most marriages – if you’re going to pay yourself a super pension from your SMSF in retirement.
Choosing to run your own fund usually means that you’re confident you can deliver better returns than the professionals (see SuperGuide article Large funds outperform SMSFs over 10 years, just), or run a more cost-effective super fund than the larger fund options (see SuperGuide articles SMSFs: How much does a DIY super fund cost? and SMSFs: Enough super to justify SMSF running costs?.
Note: As trustee of your SMSF you must draft an investment strategy, follow special investment rules, and choose investments that will deliver you a retirement benefit when you finish work. If you know nothing about investing, a SMSF is not the place to begin your investment classes.
Reaching critical mass
For a self-managed super fund to be cost-effective, the general view is that you need a superannuation balance of around $200,000, although many SMSF providers believe the cost-effective balance is above $250,000. If you don’t have $200,000 in super it may still be cost-effective if you plan to make substantial super contributions in the first year.
On average, you can expect annual costs to be between $1,500 and $5,000 (although some SMSF service providers promote fixed costs of under $1,000). Your fund costs may be higher depending on how complicated your fund’s investments are, and whether you hire a professional administration company or rely on your accountant or adviser to do a lot of the administration relating to your fund.
The costs of setting up a SMSF can range between $660 and $3,300, depending on how much advice you need, and whether you have a corporate trustee, or appoint individual trustees to run the SMSF. For more information on SMSF costs, see SuperGuide articles SMSFs: How much does a DIY super fund cost? and SMSFs: Enough super to justify SMSF running costs?.
The decision to run your own super fund also depends on how willing you are to get on top of the superannuation laws, and the tax rules and reporting requirements. For more information on your responsibilities as a SMSF trustee, see SuperGuide articles SMSFs for Beginners: Trish’s 10 commandments of DIY super and SMSF compliance: Is your fund due for a super service?.
If you do have fund choice, and you’re considering a self-managed super fund then you need to start planning. Your SMSF must be fully operational before you can change funds. Many SMSFers choose to appoint a service provider to assist them with running a SMSF (for more information, see SuperGuide article SMSF providers: What should I look for when setting up my DIY super fund?).
Going solo in super is a long-term financial decision. An SMSF may be a feasible option for an individual if you consider you meet the following criteria:
- Have more than $200,000 to $250,000 in super savings, or plan to accumulate around $200,000 to $250,000 fairly quickly after setting up your SMSF, either by yourself or between the other members of the SMSF. Alternatively, if you start a SMSF with a low balance, then you can expect a high percentage of your super savings to be eaten up in costs.
- Access to an adviser who knows a lot about SMSFs
- Comfortable with the costs involved in setting up and running the SMSF
- Experienced in investing, and keep up to date on the markets and investment trends
- Familiar with, or willing to learn about the superannuation rules
- Aware of the administration and compliance work involved in running the SMSF
For more information about SMSFs, click on the ‘SMSFs’ tab on the menu at the top of this page, or search for a specific topic in the search function at the top of this page. When you click on the ‘SMSFs’ tab, you can also access our ‘SMSFs for Beginners’ section.