The ins and outs of self-managed super

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1 The ins and outs of self-managed super Everyone likes to be in control of their own destiny particularly when it comes to finances. Running your own super fund and therefore taking complete control over your super investment can sound like a good idea, but are you aware that it also comes with a big range of responsibilities and legal obligations? What is an SMSF? A Self-Managed Super Fund (SMSF) is a super fund generally started by a few connected individuals (e.g. a family). An SMSF must have fewer than five members and generally each member must hold the role of a trustee or director of the SMSF s corporate trustee. All SMSFs are regulated by the Australian Taxation Office and must comply with relevant governing rules and current legislation. This means all members of an SMSF are responsible for: complying with the trust deed, which is the legal document setting out the rules for setting up and operating an SMSF. Together with super laws, the trust deed forms an SMSF s governing rules developing an investment strategy under which the trustee selects and manages the fund s investments, ensuring that those investments meet the sole purpose test (see opposite) completing all of the fund s administration, and managing the fund s compliance obligations, including lodging annual returns, accounting and regular audits as well as a range of other responsibilities, detailed on the government s Moneysmart 1 website. As a result of the time some of these obligations demand, many people with SMSFs outsource the performance of some of these activities to specialised providers for a fee. Why choose an SMSF? Generally people are motivated to try self-managed super to have more control over their superannuation savings. Other common reasons provided are 2 : A A I can do just as well or better than the big super funds Many people that choose an SMSF believe that they would achieve better investment outcomes than fund investment managers; to gain access to a wider choice of investment options Some are attracted to the wide range of direct investment options available through an SMSF, in particular, the ability to purchase direct property (such as direct residential or commercial property); and they are acting on the advice of an accountant or financial adviser Advisers are a key source of DIY super referrals, and are often involved in providing ongoing advice to members of self-managed funds. Important note: If you re considering an SMSF, you should check with your employer whether or not they are able to pay your employer s superannuation guarantee contributions into an SMSF account. The sole purpose test essentially means the fund must be maintained for the sole purpose of providing retirement benefits to members or, upon their death, their beneficiaries (or other ancillary purposes). It has been interpreted by the courts as requiring trustees not to invest with the purpose of directly or indirectly obtaining immediate financial benefits for members (other than increasing returns to their SMSF). Breaching the sole purpose test can lead to significant penalties, and can also mean missing out on tax concessions Investment Trends SMSF Investor report April 2013

2 2 Advantages of running an SMSF Greater control When you have an SMSF, you and any other members are in control both financially and legally. You control the investment strategy, all investment decisions and you re also legally responsible for the fund s administration and compliance. Setting the operating rules As trustees, you set the operating rules of the fund. You have flexibility and control over the rules as long as your fund meets the operating standards required under superannuation law. You must also be aware of and comply with any regulatory changes and ensure your fund meets its compliance obligations. Flexible investment choice When it comes to investing, you have more control over what, when and how much to put into each investment you choose. You can also switch or modify these investment options whenever you see fit. SMSFs and property Buying direct property is a common reason people cite for choosing self-managed super. While it is possible to purchase direct residential and/or commercial property through an SMSF, the property must be in line with the fund s investment strategy, as well as meeting the sole purpose test (see page 1) and other operating standards regarding investments. For example, residential property generally can t be acquired for the purpose of it being occupied by or rented to members of the fund. This means holiday homes and the like are generally not eligible investments. Certain concessions apply for business real property. In addition, the cost of maintaining direct property must be met from the assets of the fund. If your SMSF has limited assets beyond any property held, then repairs and maintenance may be difficult to complete without making further contributions to the fund. This may be problematic if you are close to or exceeding your concessional or non-concessional contributions cap. Don t rush into it! Here are some things you should think about before you establish an SMSF. If self-managed super appeals to you, we encourage you to consider these questions before making a decision. DO YOU HAVE ENOUGH MONEY TO JUSTIFY HAVING AN SMSF? Super DIYers are responsible for their fund s compliance, so it s important to ensure that the fees payable, including those charged by your accountant, financial adviser and auditor, will not outweigh any potential investment or other gains. Generally you ll need a large amount of money in the fund to make set-up and running costs worthwhile. 3 A report commissioned by the Australian Securities and Investments Commission (ASIC) 4 found that the annual cost of running a self-managed fund with a balance of $150,000 can range from $1,212 to $2,536 (for someone performing most of the administration themselves) to $2,517 to $7,612 (if the DIYer outsources the running costs to an external provider). The report goes on to point out that SMSFs with balances of $200,000 or more provide equivalent value to industry and retail funds provided the trustees undertake some of the administration, and SMSFs with balances of $500,000 or more can provide equivalent value to industry and retail funds on a full service basis. Estimated annual fees and costs for a UniSuper Accumulation 1 account with a balance of $150,000 invested in the Balanced option would be approximately $1,120.* DO YOU HAVE THE TIME? Running an SMSF can be time consuming, particularly when compared with the amount of time most people spend engaging with a conventional super fund. It is also important to note that any outside help you get, for example accounting, administration, auditing or legal advice is likely to be at an additional cost to the fund. You ll also need to learn and keep abreast of the frequent changes to SMSF rules and regulations and make sure your fund complies. * These costs are based on an Indirect Cost Ratio (ICR) of 0.67% p.a. for the period ending 30 June This amount is indicative only. This ICR only includes contribution to UniSuper s Operational Risk Reserve from 1 January 2013 to 30 June 2013 calculated at a rate of 0.06% per annum. The figure for future financial years will include the full year contribution of 0.06%per annum. The amount of indirect costs you will be charged in subsequent financial years will depend on the actual fees, costs and taxes incurred by the Trustee in managing the Balanced investment option. The estimated fees do not include investment switching fees, fees for personal financial advice or insurance premiums. Refer to the Product Disclosure Statement available at for more information about fees and costs Costs of operating SMSFs - ASIC, May 2013, Rice Warner Actuaries. Available for download at bit.ly/1drqzmn

3 3 DO YOU HAVE THE KNOWLEDGE AND EXPERTISE TO OUT-PERFORM THE PROFESSIONALS? Super funds employ professional investment managers to manage members investments. This involves investment managers diligently monitoring portfolios in their care, assessing risks, and adjusting holdings as required. Conventional funds also have the benefit of in-house legal, compliance and finance teams whose role it is to ensure the ongoing compliance of the fund. DO YOU REALLY WANT THE RESPONSIBILITY? Although you can outsource many of the obligations of running an SMSF and obtain professional advice, in the end, you will still be legally responsible for every decision and every action your fund makes. Non-compliance can result in fines and other penalties. ARE YOU WILLING TO BUY SEPARATE LIFE INSURANCE AND INCOME PROTECTION? Some people may also be unaware that by moving all of their existing super to DIY super, they lose any insurance for death and disability they had through their former super provider. Purchasing this type of insurance directly through an external provider may be more expensive, and will require some ongoing administration. UniSuper offers access to competitive insurance because of its large membership base and bulk buying power. Just like any other approach to super, self-managed super has both pros and cons. To help you consider your options, we ve put together a quick comparison between an SMSF and UniSuper. Investments Administration Insurance SMSF Collectively, the member trustees (or directors of a corporate trustee) are responsible for all investment decisions, strategy, monitoring and research The ability to invest directly in a diverse range of asset classes and investments that suit the tastes and goals of the members Due to the smaller fund size, an SMSF may not be able to access the same investments possible through a larger super fund Generally, each member is a trustee or director of the SMSF trustee company. The trustees are responsible for the administration and compliance of the fund, including keeping up with legislative and regulatory changes Trustees must source their own death and disability insurance cover A A Individual members may not be able to access the same level of cover without providing medical evidence UNISUPER UniSuper is responsible for all investment decisions using an experienced in-house team of professional investment managers to assist with strategy, monitoring and research Members gain benefit of scale as part of a fund with more than $38 billion 5 under management with a strong record of longer term performance. 6 Access to a sophisticated and diversified portfolio of local and global assets including property, infrastructure and private equity through a range of investment options. You can select from one or more of these investment options based on your investment objective and risk appetite. All administration and compliance is the responsibility of UniSuper Members with accumulation balances can switch investment options Members can manage their account details online and in one place via MemberOnline UniSuper members benefit from competitively priced insurance cover 7, including automatic Death and TPD for Accumulation 1 members, and inbuilt benefits for Defined Benefit Division and Accumulation 2 members 5 As at 31 December APRA ten year fund-level rates of return data. Note past performance is not a guarantee of future performance. The APRA rates of return represent combined net earnings of a superannuation fund s assets across all of its assets and investment products; they do not report on the rates of return of each investment option offered by superannuation funds. 7 SuperRatings Fundamentals, 30 September 2013

4 4 Life events Dealing with risks SMSF If one member decides to roll their funds to another superannuation fund (e.g. in the event of a relationship break-down), dividing assets in an SMSF can be difficult, as can be winding up an SMSF, depending on the nature of its investments If your circumstances change, you may need to sell illiquid assets like property, which can be time-consuming and complex Paying a pension from an SMSF can be complicated, particularly when only one member is in pension phase. At this point, to maximise the tax efficiency of the SMSF, you will need to either segregate the assets backing the pension or obtain an actuarial certificate to confirm the amount of income exempt from income tax. Running (or winding up) an SMSF may become a burden when members no longer have the same enthusiasm or interest The ATO is not a prudential regulator its primary role is to ensure that the tax concessions available to complying superannuation funds are not being abused No access to the Superannuation Complaints Tribunal, a relatively low-cost jurisdiction. This may mean that SMSF members have to apply to the courts to resolve disputes, which could prove costly If members are victims of fraud or theft they have no access to the compensation scheme that applies to APRA-regulated funds UNISUPER Members with accumulation balances can easily change their investment options within accumulation products if their personal circumstances change such as in the event of a divorce Eligible members with accumulation balances can easily move their superannuation into a pension product within the fund when they want to begin to draw a retirement income stream UniSuper offers extensive fee-for-service advice through UniSuper Advice, which is available to members and their spouses UniSuper is expected to be a continuing fund for the foreseeable future Strong oversight by a prudential regulator and an in-house legal and compliance team mitigate UniSuper s risk In the event a member is dissatisfied with their treatment at UniSuper, they generally have access to the Superannuation Complaints Tribunal Members may have some protection against loss due to fraud or theft under the compensation scheme that applies to APRAregulated funds Do your research! If you re thinking about self-managed super, make sure you do your research. How you invest your retirement savings now can have a significant effect on the way you live your life in retirement. When obtaining professional advice about an SMSF, make sure you find out what the set-up and ongoing costs are likely to be. Think about what decisions and ongoing duties you will take on and which activities you will need or prefer to outsource and therefore pay for. The ATO provides a detailed overview about what you need to know if you re considering an SMSF. Visit its website at to find out more. Cover your bases If you choose to leave UniSuper it can be difficult to rejoin unless you start working again in the higher education and research sector. So, if you decide to establish an SMSF, it might pay to keep some funds with UniSuper to continue your insurance through the fund and/or in case you re not happy with your SMSF and you wish to resume active membership with UniSuper. Additionally, as it becomes more difficult to transfer insurance as you get older, check that you can get the appropriate level of cover before you decide to make a move.

5 Your checklist questions to ask your SMSF adviser Super funds are legally obligated to exercise all of their duties and powers in the best interests of members. Accountants, Administrators and SMSF advisers are not regulated in this way. Before signing on the dotted line and opening an SMSF, make sure you ask your adviser the following questions: Are my net investment returns (i.e. after fees and costs) likely to be higher in an SMSF? No Yes. Why do you think my net returns will be higher? Is my level and coverage for death, disablement and income protection insurance likely to reduce? No Yes What activities will I be required to perform and how much time is each task likely to take? What approximate fees and costs will I incur for the following with an SMSF? Establishment including legal work Investment and strategy advice Administration Auditing Insurance cover Other fees UniSuper Advice can help To make sure your hard-earned retirement savings are maximised, we recommend you speak to a qualified financial adviser. For expert advice about making the most of your super from someone who understands the unique employment patterns and challenges of working in higher education and research, call UniSuper Advice on between 8.30am and 5.30pm (Melbourne time) Monday to Friday to make an appointment. ADVICE For further information about the services provided by UniSuper Advice please refer to the Financial Services Guide available from /advice. UniSuper Advice is operated by UniSuper Management Pty Ltd, which is licensed to provide financial product advice to members and their spouses. This information is of a general nature only and includes general advice. It has been prepared without taking into account your individual objectives, financial situation or needs. Before making any decision in relation to your superannuation, you should consider your personal circumstances, the relevant product disclosure statement for your UniSuper membership category and whether to consult a licensed financial adviser. You can obtain a copy of the relevant product disclosure statements by calling our Member Helpline on or visiting our website at /forms-and-documents/product-disclosure-statements. This information is current as at the date of publication, January Information is subject to change. Issued by UniSuper Management Pty Ltd on behalf of UniSuper Limited, the trustee of UniSuper. Issued by: UniSuper Management Pty Ltd ABN , AFSL No on behalf of UniSuper Limited the trustee of UniSuper, Level 35, 385 Bourke Street, Melbourne Vic Fund: UniSuper, ABN Trustee: UniSuper Limited, ABN Date: January 2015 UNIS