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SMSF – Your questions answered, day two – why do people set up SMSFs?

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I’ve been encouraged to start my own self-managed super fund (SMSF) by a friend of mine. I’m no expert on the stock market or on investments but I like the lower costs of a SMSF. Should I set up an SMSF?

I like them for some people and I have clients where they have suited perfectly. They’re great for people who have a large nest egg (say, $500,000) and are reasonably sophisticated with investing. They may also want to bring down their overall fees and should be happy to work with an adviser.

For those solely wanting good returns, industry or commercial funds can be more suited. To people who want around nine to ten per cent return for the long-term, the best super funds can do this on average.

By the way, the industry funds are considerably cheaper than financial institution super funds and have outperformed them. They are worth thinking about when looking at the SMSF option. That said, industry funds can be hard to work with as their back office can be slow and less helpful than other non-industry super funds.

My best advice is to work out the total costs of a SMSF. You will have accounting costs, which can be hefty, but the bigger the amount invested, the smaller the percentage cost.

If you’re using an adviser then there’ll be a cost there as well and then you could have stockbroker costs when you buy and sell shares.

The industry funds I prefer cost around 0.8 per cent of your invested amount but some are cheaper and others are dearer. Financial institution super funds are generally over one per cent and some can be considerably higher.

If you’re going to do it yourself, do lots reading, get a good accountant who specialises in super for great advice on setting it up, and ring around to get a handle on average costs. Also, it’s important to have a well-balanced portfolio of assets.

Know what you’re getting yourself in for – be prepared to spend a lot of time doing it right and it can be a rewarding alternative to public super funds. If you’re disorganised, busy and/or not interested in investments, forget SMSFs.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Tuesday, December 21, 2010

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