Self managed superannuation funds (SMSF) are the fastest growing sector of the superannuation industry.

There are in excess of 350,000 SMSF's in existence and up to 2,500 SMSF's created each month.

Why are they so popular? What are the pros and cons? This article could cover a whole newsletter, but following is a brief summary:

Pros

• Management - you manage the superfund yourself. You make the management decisions about where you get investment advice from, where you get accounting and audit advice from, where you get financial planning and insurance advice from, what record keeping you want to do and what you want someone else to do. You may in fact decide to do most of this yourself or bring in trusted advisors to help you with your decisions.

• Investment - you make the investment decisions. Many SMSF's start when the members are disillusioned with their superannuation earning negative returns, but still having to pay investment manager fees. Many SMSF's have invested in term deposits or property over the past 12-24 months to avoid negative returns from equity investments exposure. They would have had less control to be able to do this if they were with a retail or public fund.

Recent legislation now allows for SMSF's to borrow in order to acquire investments allowing more funds to enter the property market and to take advantage of the recent economic downturn via greater exposure. SMSF's further allow for members to purchase private and unlisted public investments as well as alternative investments including artwork and collectables.

• Cost - you can better control the costs. A SMSF will pay an accountant to prepare the fund's annual financial statements. This could range from $1,100 - $5,500+ depending upon the size of the fund and the number of investments and transactions. A SMSF will pay an auditor to audit the fund's annual financial statements. This could range from $330 - $1,100+, again depending upon the size of the fund and the number of investments and transactions. A SMSF could also pay a stockbroker (usually brokerage per buy or sell share trade), a financial planner (percentage of assets or hourly rate - or possibly $NIL if only insurance products obtained as their fees are currently paid by the insurance company).

These contrast with a public or retail super fund and industry funds which charge a management fee equal to a percentage of the account balance (usually 1% - 2%). For example: the annual running costs of an average SMSF could be around $3,850 ($2,200 accounting, $550 audit and allowing $1,100 for brokerage or financial planner). If the balance of the fund was $500,000 this would represent running costs of 0.77% contrasted to a public fund which may charge between 1% - 2% or $5,000 - $10,000.

• Flexibility - you control the flexibility. Since the legislation was changed from 1 July, 2007 regarding pensions many SMSF's now pay a pension (or multiple pensions). SMSF's are very flexible when it comes to retirement planning and the tax savings a pension can provide.

For example a member may have two running pension accounts with one having a high concessional component with the other having a low concessional component with the strategy that any annual pension payments in excess of the minimum requirement be allocated against the higher concessional component balance to reduce the tax payable upon death of the member.

Cons

• Management - you manage the superfund yourself. There are some very strict rules on what a SMSF can and can't do. If you get it wrong the penalties can be very expensive. This is where it would pay to have an Administration company to be able to look after everything for you so there is no risk that you will get it wrong.

• Investment - you make the investment decisions. Do you have the expertise to outperform a professional fund manager? Some SMSF's may have continued to be invested since March in term deposits earning 4% per annum to avoid negative returns, but those funds have missed out on the 50% rebound in the stock market over the past 6 months.

• Cost - If you have a small fund (ie < $200,000) the costs may be more than a public or retail fund. As seen above it becomes a cost saving the larger the fund becomes. The other cost is the cost of your time if you try to do it yourself. This can be avoided if you appoint an Administration company to look after it all for you.

Setting up a SMSF (which can cost from around $900- $1,500) and running your own SMSF is not a decision you should take lightly. You MUST talk to your advisor first to ensure you fully understand what is required and where to get additional education from