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While self-managed super funds (SMSFs) are a good way to save for your retirement, there are certain risks involved. SMSFs differ from other types of superannuation funds in that members are also the trustees and are responsible for managing their investments. They must also comply with the associated legal and tax laws that come with managing a super fund.
One reason many Australians are taking up this model of super investment is because it gives them the power to choose how the funds are invested, instead of relying on fund managers to make investment decisions on their behalf.
Under the Financial Claims Scheme (FCS), also known as the government deposit guarantee, an SMSF is considered a single entity and therefore only entitled to the recovery of up to $250,000 regardless of the total sum held or the number of people invested.
SMSFs are exempt as authorised deposit-taking institutions (ADIs) under the FCS and as such are not insured in the same way as your typical savings account. Regular savings accounts are typically covered under the Government Guarantee.
The FCS was created in 2008 in the wake of the global financial crisis and has since been amended to reflect the returning strength of Australia's financial institutions.
The Australian Prudential Regulation Authority (APRA) is responsible for administering the FCS.
It provides protection for deposits made at authorised deposit-taking institutions (ADIs), offering protection for each “account holder” in the remuneration of up to $250,000 in the case of insolvency. APRA does not consider SMSFs as ADIs under the FCS – instead SMSFs are considered single “account holders” and as such are only eligible for cover up to $250,000 collectively.
An “account holder” as defined by APRA includes:
Jack holds a savings account with a $250,000 balance with ING. He also holds an SMSF with a balance of $1 million with ING. The SMSF has a total of four trustees.
Under the government guarantee, Jack is covered up to $250,000 for his savings account. His SMSF is covered up to $250,000 collectively. This means that if all three trustees hold an equal share of the SMSF, Jack is covered up to $62,500.
Note: In the case of funds that are recognised under APRA, they may be charged a levy to subsidise the government protection of member funds.
APRA determines which banking institutions and other financial entities are covered under the FCS and qualify for the $250,000 protection per “account holder” per ADI.
This means if you have $250,000 with one APRA-approved ADI, and another $250,000 with another, you are eligible for the protection of both sums. However, if you have more than $250,000 with one ADI, only $250,000 is protected.
SMSFs are deemed ineligible for protection under the FCS by agreement of the Australian Government under the Superannuation Industry (Supervision) Act 1993 – Sect 229.
As such, SMSF regulation doesn’t fall under the jurisdiction of APRA, instead coming under the regulation of the ATO. This carries some pros and cons.
The main benefits and risks of joining an SMSF include:
When choosing between freedom of investment versus government protection and cheaper insurance, your choice will be governed by your own needs and personal preferences. Take a look at our definitive guide to SMSFs here before deciding.
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