My Self Managed Super Fund is too volatile and expensive.
Filed Under: Superannuation
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Q. My Husband and I have a SMSF (at the suggestion of our Adviser) of about $600K, I have an Industry Fund i.e. First State Super (NSW) of around $99K, with a diversified portfolio we are paying our adviser 1.25%, plus the accountant for the Tax return.
During the times of extreme volatility the Industry fund was not “hammered” nearly as much as our own fund, we are considering moving all funds to the Industry,as the fees are much less. Can or should we and what could be the implications e.g. CGT etc We are both 57 and not working and may need to draw down in the near future.Josie’s answer: As you did not mention where your funds are invested within your Self Managed Superannuation Fund (SMSF) it is difficult for me to provide an opinion as to whether you should redeem these investments and transfer to an industry fund, such as First State Super (NSW). However, I would like you to think about the following:-
- Have your investments within your SMSF been extremely volatile because of lack of diversification e.g. a large proportion is invested in Australian and International shares? Your investment in First State Super (NSW) is probably within a ‘balanced’ style of fund , which has spread your money across a range of asset classes, such as cash, fixed interest, property and shares, both in Australia and overseas. You should not jump to the conclusion that First State Super is better because over an extended period of time, e.g. 10+ years, there are no guarantees it will look healthier.
- Are the investments within your SMSF appropriate to your risk profile? In other words, does it pass the sleep test? Do you worry too much about the ups and downs of the sharemarket? It sounds as if you are more comfortable with a ‘balanced’ style fund. Therefore, I suggest you look closely at the investments within your SMSF and if you are not comfortable and prefer less volatility, then you might be better off, from a peace of mind point of view, to rebalancing your investments to a ‘balanced’ style portfolio either within your SMSF, an industry fund or retail fund. However, there is also a saying ‘the higher the risk, the higher the return’. Based on this theory, you may to have to accept a lower return over the long term.
- Are you tired of the hassles associated with managing a self managed superannuation fund? As you would be aware, you are the Trustee of your own superannuaton fund and this comes with lots of responsibilities. Yes you can seek advice and outsource some of the tasks, such as developing an investment strategy, but the buck ultimately stops with you. The Australian Taxation Office are quite vigilant and do not tolerate mistakes. SMSF are ideal if you prefer to invest directly e.g. investment property.
- Do you fully understand the costs attached to both your SMSF and industry fund. There is no such thing as a free lunch. I would suggest that you undertake a detailed analysis of both options. We know you are paying your financial planner 1.25%pa and based on a $600K investment, this means you are paying approximately $7,500 per year which means that year in year out you are giving away 1.25% of your return. It is also means you have less to spend on yourselves and your family in retirement. It appears to be quite expensive, but I am also assuming you are not contacting your financial planner every second day taking up a lot of his/her time. Personally, I do not like percentage fees, because as a general rule, they normally do not relate to the amount of work that is actually undertaken. For example, if you had a total of $300K in your fund, then your financial planner would probably be charging you $3,750 and perhaps doing the same amount of work. I recommend you pay a flat annual fee and ask for a summary of all the services the practice is providing. You also need to check whether you are paying an administration fee on top of the adviser fee. As you state, you are also paying for an accountant to prepare a tax return for your SMSF and it also requires an annual independent audit. Further, if you are invested in managed funds within your SMSF you are paying a management fee to the fund manager, normally 1-2%pa.
- The fees within industry funds are cheaper as they have the economies of scale i.e. they can spread the costs of running a superannuation fund across thousands (if not millions) of accounts. They usually charge an annual administration fee of around $50-$100, and there will be a management fee attached to the investment option you have chosen, usually around 1-2%. What I like about Industry and retail funds, such as those offered by AMP, MLC, ING etc is that they quote returns net of fees and tax. From my experience, most people with a SMSF can rarely tell you what their return is after tax and fees. If you don’t know the answer, then you should ask your adviser to provide you with this information. Just make sure it is after tax and all fees, i.e. cost of running the fund, adviser and accountant fees.
- If you do switch your $600K investment to an Industry Fund, there will be costs associated with closing your SMSF and potentially a capital gains tax (CGT) liability. The maximum CGT you pay within super is 10%. You will need to contact your Adviser who should be able to access a report which provides this information. There is no argument that you will pay less in fees if you transfer to an industry or retail fund and alleviate the current hassles of managing your own super fund, but it is not a guarantee that you will actually end up with more in retirement. Nobody, including your current adviser or those bestowed with the responsibility of managing the investments at First State Super (NSW) have a crystal ball. Consequently, it is imperative you do your research. Perhaps you should seek a second opinion from another financial planner (ask for an upfront quote).
- You mentioned you are probably going to retire in the short term. As a result, I encourage you to seek professional advice. In particularly, talk to a financial planner about a strategy known as ‘transition to retirement’. Basically a strategy where you salary sacrifice your income and draw income from your super fund without compromising your current lifestyle. It can potentially save you lots of tax.
I know there is a lot you need to consider, but we are talking about your life savings which is a life time of hard work. I could go on forever with your question, but need to keep it reasonably brief. You cannot afford to make costly mistakes.
You will be fine as long as you do your homework which means you will then be in a position to be assertive when seeking advice from professionals. Good luck and if you need clarification on any of the above, please don’t hesitate to contact me again. Cheers and I wish you and your husband a happy and stress free retirement. Josie KayStill hungry for more on SMSF?
Self-managed super: treat with caution
Who is Looking After Your Self Managed Super Fund?
SMSFs urged to watch the fees
Who are self managed super funds for?
Self-managed superannuation fund regulation and governance
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