Self-Managed Superannuation Funds: Pros and Cons

We receive regular enquiries from ADF members and their families about the pros and cons of DIY superannuation funds (technically called self-managed superannuation funds or SMSFs). An SMSF is now a choice available to ADF members in some circumstances. They are especially relevant to those who joined the ADF for the first time after 30th June 2016 (at which time MSBS was closed to new members), but they are not suitable for everyone.

The enthusiasm with which Australians have embraced SMSFs is remarkable. SMSFs, of which there were nearly 616,400 in March 2024, now account for more than 99% of all superannuation fund entities, contain about 24% of all Australian superannuation fund assets, have an average balance of over $1.4 million and a combined membership of 1.1 million people.

What’s driving this growth? Could it be generous tax breaks? That’s unlikely because the same tax breaks apply to the superannuation system as a whole, not just to SMSFs. Could it be that the costs of running an SMSF are lower than institutional alternatives? That’s also unlikely as the costs of and of running such a fund can be considerable, after factoring in administration, management, accounting, compliance and auditing costs from a wide range of service providers, not to mention the sometimes stressful allocation of time by you and your family who are members of the SMSF.

More likely, the growth is caused by the desire on the part of members of these funds to have direct control over their investments. Throughout the four decades since the inception of this form of superannuation, clients have rarely needed much convincing about the merits of establishing an SMSF. So that by the time they consult an accountant or financial adviser, many people have already persuaded themselves that they can achieve a better rate of return than professional investment managers; and even if they can’t, at least the money will be kept out of the hands of the “forces of darkness” (banks and funds managers). In fact, some clients want to keep control at almost any cost, which is ironic when the reality is that a large proportion of funds invested in SMSFs is often held in low interest earning term deposits controlled by the very institutions that they love to hate.

The SMSF phenomenon has given birth to an industry within an industry, representing the so-called “SMSF sector”. The industry contains articulate and well-funded associations of service providers, often promoting the merits of SMSFs over other forms of superannuation. Recently, we have seen the rise of “SMSF educators” whose principal purpose appears to be to convince members of the public to use SMSFs to gear (borrow) into investment properties on the basis that real estate is always a winner.

A significant challenge to the viability of the SMSF sector is the ageing cohort of SMSF trustees and their ability and enthusiasm to manage and control their superannuation affairs. In the not too distant future, there will be tens of thousands of SMSF trustees in their 70s, 80s and beyond. This presents risks at many levels.

There is the regulatory risk that trustees will fall short in their compliance obligations. There’s also the risk of poor investment decisions caused by incompetence and diminished cognitive abilities. And then, sadly, there is the risk of elder abuse by professional advisers and relatives seeking access to large sums of money that are typically held in SMSFs. These risks, particularly the latter, are not just theoretical.

The message here for ADF members and families is to think carefully before making a decision to establish a SMSF. The first question to answer is whether you have enough money in the fund to make it a viable proposition. Many experts are adamant that you should start with at least $500,000 in the fund while others suggest an SMSF is viable with much less, say $200,000. Answering that question requires an analysis of investment returns and costs. A qualified accountant or licensed financial adviser may be able to assist you with this (an additional cost to consider).

Then ask yourself whether the idea of being so deeply involved in the operation of a superannuation fund is something that appeals to you. Or would you prefer to appoint someone else (such as a publicly available superfund) to undertake those tasks? We’re certainly not suggesting what you should or should not do, but the decision to establish a SMSF is not to be taken lightly.

It’s a decision that should be made for the right reasons, including your acknowledgement that a properly run SMSF requires allocation of a considerable amount of your time and a willingness to accept personal responsibility, compliance and investment risks.

Therefore, before jumping into a decision you might regret, take your time and consider your options carefully. We recommend the Australian Taxation Office website as an independent source of technical information about SMSFs.

If you choose to seek professional advice before making such an important decision (highly recommended!), our website contains a considerable amount of relevant educational material.