The ATO estimates that over 32,484 self-managed superannuation funds (SMSFs) were established from June 2013 to June 2014.
There are as many different motivations for establishing an SMSF as there are valid reasons for doing so.
Nearly one in ten Australians with super self-manages their own fund.
For many people their super is their second biggest asset after their home, so it makes sense that they would want to take control of their financial future.
Rapid industry growth
The SMSF sector is experiencing rapid growth. According to the ATO, SMSFs accounted for 30 per cent of the $1.9 trillion total super assets in Australia.
In total there were 534,000 SMSFs holding $557 billion in assets, which represents a 300 per cent increase in funds managed over the past decade.
Of the 11.6 million Australians who are members of super funds, over one million self-manage.
Research conducted by the ATO estimates that SMSFs experienced a positive return on assets of 10.5 per cent in 2012–13.
SMSFs directly invested 78 per cent of their assets, mainly in cash and term deposits and Australian listed shares.
Why are people switching?
Those are some spectacular numbers, but what’s driving them? There are two clear benefits of being in an SMSF: greater control, and wider investment choice.
As people approach retirement they want to maximise their super potential, and an SMSF puts your hand on the tiller.
In many cases it may be easier for SMSF trustees to buy and sell assets quickly.
You can act immediately when making investment decisions and take advantage of time-sensitive opportunities.
As an SMSF can have up to four members, resources can be pooled to access high value assets beyond each individual’s reach.
Australia’s property boom has made real estate a very attractive asset, but the soaring prices have also made it less accessible for individual investors.
SMSFs make it easier to include property in your portfolio.
SMSFs enable members to invest in ways that often aren’t available in many large super funds.
An SMSF can hold unlisted shares, direct property, collectibles such as fine art and other exotic investments.
Under strict conditions SMSFs can also borrow to invest. This kind of gearing is generally not available with large super funds.
SMSFs may also have lower costs. Those that invest directly, rather than through large investment funds, won’t have to pay fees on a percentage of their investments.
Another major benefit is greater control and flexibility over tax, which can be significantly reduced.
The fund also only has to do one tax return, rather than up to four for each individual member.
Future of self-managed super
Managing an SMSF is time-consuming and requires investment knowledge and experience.
Typically, SMSF members tend to be older than members of APRA funds, with higher average balances and higher average taxable incomes.
However, increasing numbers of younger Australians are also switching to self-managed funds.
For the first time, in 2013, the median age of SMSF members of newly established funds fell to under 50 years old.
The ATO already regulates SMSFs, which are governed by the Superannuation Industry (Supervision) Act 1993, known as SIS.
But their growing popularity is seeing increased scrutiny from both the ATO and the Australian Securities and Investments Commission (ASIC).
This is expected to increase confidence in the sector and ensure that people’s retirement savings are not at risk of poor management or investment advice.
If you set up an SMSF, you're in charge of both the investment decisions for the fund as well as complying with the law.
It’s an exciting opportunity but also a serious financial decision, and you need both time and skills to do it.
If you want to learn more about SMSFs, download an today.