Self-managed super: treat with caution

Whenever investment markets experience a difficult time, there tends to be an increase in the number of self-managed super funds being established.

The reasoning is that many people faced with negative returns from their large super funds think they can do a better job themselves with a SMSF.

The flaw in this reasoning, of course, is that the investment markets are the cause of the widespread lower returns - not the super funds themselves.

While SMSFs can potentially provide great opportunities, fund members should not establish one in the belief that they can suddenly perform investment miracles that fund professionals guiding their large funds have been unable to achieve.

The potential positives of SMSFs include: the ability for members with large balances to reduce costs; the adoption of innovative and tailored strategies; and the ability to acquire and hold certain assets (such as selected unlisted shares, and business real estate acquired from a fund member); and the ability to make in-specie (in kind) contributions.

And fund members are often motivated to setup SMSFs to gain what they believe is much greater control over their retirement savings.

But any decision to establish your own fund should only be done after much consideration, examining the positives and negatives.

When the superannuation law was amended from September last year to unequivocally allow funds to borrow to invest provided strict conditions were met, it may have seemed to many fund members that the control of self-managed super was being somewhat relaxed. (The new borrowing rules include that a geared asset must be held in a trust until the final payment is made, and that the lender does not have a claim against any of a super fund's other assets in the event of a default.)

But the new Minister for Superannuation, Senator Nick Sherry, is clearly disturbed by the level of ignorance among some SMSF trustees about even some of the most basic rules of super. And Senator Sherry is disturbed that many SMSFs are being operated with extremely small balances that make them highly ineffective from a cost perspective.

The reality is that would-be trustees of SMSFs should expect the regulator of self-managed super, the tax office, to continue to tighten the regulation of both SMSFs and their professional auditors.

ATO figures show that the average assets in a SMSF have shot past $800,000. Read more.

These are awfully big dollars for trustees who don't know what they are doing, who are ignorant of even the most basic rules of self-managed super, and who do not gain professional investment advice when necessary. Take extreme care.