ASIC has warned Australian investors considering establishing their own self-managed superannuation fund (SMSF) to be particularly aware of the potential downside to such a strategy, and that many Australians set up SMSFs that are inappropriate for their circumstances.
ASIC has identified eight 'red flag' situations which, together or in part, would make it extremely unlikely for an investor to gain any advantage from using SMSFs to create and safeguard their intended retirement lifestyle.
Australian Tax Office figures reveal that as at 30 June 2019, there were 599,678 SMSFs in Australia holding nearly $748 billion in assets, making total assets held in SMSFs larger than those in either industry ($719 billion) or retail ($626 billion) funds.
ASIC Commissioner Danielle Press said, 'ASIC believes that consumers are all too well aware of the potential benefits that might stem from using a SMSF, but are not equally alive to the considerable risks and responsibilities that come with the deal.
'SMSFs may be an attractive option for investors wanting more control over their superannuation investment strategy, but it requires real skill, care and diligence to manage your own superannuation. SMSFs are not for everyone simply because not everyone can meet the significant time, costs, risks and obligations associated with establishing and running one.'
ASIC previously tracked and analysed member experiences in using an SMSF, and whether advice providers were complying with the law when providing personal advice about setting up an SMSF (refer Background). The research identified the 'red flag' indicators that suggested when an SMSF may not be appropriate for an investor.
'Our research found that SMSFs are not suitable for members with a low fund balance, particularly where they have limited ability to make future contributions. This is important because consumers starting off with a low balance need to be aware that they may not be in a better financial position in the future by holding an SMSF compared with investing in an APRA-regulated fund,' Ms Press said.
There is a clear correlation between the size of an SMSF and the returns enjoyed by members. The Productivity Commission, in its report on Superannuation: Assessing efficiency and competitiveness identified that SMSFs with balances below $500,000 produce lower returns on average, after expenses and tax, when compared to industry and retail super funds.
ASIC's research also found that SMSFs are not an appropriate investment option for people who want a simple superannuation solution, particularly if they have a low level of financial literacy or limited time to manage their own financial affairs. On average, SMSF trustees spend more than 100 hours a year managing their SMSF.
'Where people have limited investment decision-making experience or prefer to delegate decision-making to someone else, they should carefully consider if an SMSF is right for them. As the trustees of their own fund, SMSF investors must remember that they are responsible for their fund's compliance with the law, even if they pay a professional to help,' Ms Press said.
To reinforce these important considerations and to help members make more informed decisions, ASIC has released a factsheet, SMSFs: Are they for you? for consumers and SMSF trustees deciding or reassessing if an SMSF is appropriate for them. The fact sheet will also be a useful resource for financial advisers when providing personal advice on SMSFs.
The fact sheet will be sent to all newly registered SMSF trustees as a pilot in November, when they register with and elect to be regulated by the ATO. ASIC will then survey a number of the SMSFs to assess the usefulness of the fact sheet.
Download the factsheet
Background
In June 2018, ASIC published two reports after examining: member experiences in setting up and running a self-managed superannuation fund (SMSF), and whether advice providers were complying with the law when providing personal advice to retail clients to set up an SMSF.
REP 575 SMSFs: Improving the quality of advice and member experiences (REP 575) provided a comprehensive overview of SMSF market characteristics and member experiences. The report also identified 'red flag' indicators that suggested when an SMSF may not be appropriate for a client, and included practical tips for advice providers to improve the quality of SMSF advice they provide to clients.
The 'red flag' indicators identified in REP 575 were:
- the client has a low superannuation balance, and would have a limited ability to make future contributions;
- the client wants a simple superannuation solution;
- the client wants to delegate all of the running of the SMSF to a paid advice-provider;
- the client wants to delegate all of the investment decision making to someone else;
- the client does not have a lot of time to devote to managing their financial affairs;
- the client has little experience making investment decisions;
- the client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (because undischarged bankrupts and persons convicted of an offence involving dishonesty are prohibited from acting as a trustee); and
- the client has a low level of financial literacy.
Report 576 Member experiences with self-managed superannuation funds (REP 576) provided insights into consumer experiences when setting up and running self-managed superannuation funds (SMSFs).
