Master of your own destiny
The super industry will have you believe it's too hard and too expensive to run your own fund but people Lesley Parker interviewed beg to differ.
The super industry will have you believe it's too hard and too expensive to run your own fund but people Lesley Parker interviewed beg to differ. To do it yourself or not to do it yourself, that is the question. Is it nobler to suffer the slings and arrows of outrageous fortune as the trustee of your own self-managed super fund (SMSF), or to take arms against a sea of troubles with the aid of professionals? It's a dilemma of Shakespearean proportions for people whose super balances, in some cases, halved in the global financial crisis and are yet to recover to pre-2008 levels.Bill, who spoke to Money on the condition of anonymity, asked himself in 2010 if he could do a better job than his existing super fund and decided he "couldn't do any worse".Robyn O'Connell and her husband, David Nugent, set up their own fund about the same time for much the same reason, deciding they preferred residential property over shares and only a DIY fund had the flexibility to allow this approach.Money decided to talk to real people about their personal experience of running their own fund after Dennis - who, like others, wished to retain his privacy - contacted us to say he thought estimates of the cost and effort of running an SMSF were often overstated.VOX POPSOur DIY-ers ranged from a couple with less than the widely suggested $200,000 to $300,000 minimum for starting your own fund, right through to a pension multimillionaire who shows that - even allowing for his high income - knowing, and making the most of, the contribution rules can take you a long way.These days, there's a plethora of SMSF administration services available but this group, at least, wondered aloud what the point of going DIY was if you didn't actually do it yourself if you replaced one set of management fees with another.That said, not all of them found it easy at first, and not everyone will have the same time and interest they do.Professional back-up would be a valid choice for people who want the control and flexibility of self-managed super but not the "homework".On cost, annual fees ranged from $1000 for Bill, whose accountant is a family friend, through to - wait for it - $100,000 for John, who just accepts that the sheer size of his family fund means the accountants get a proportionately bigger slice.Still, it would have been $200,000 in an external super fund, he says.Being master, or mistress, of your own destiny is clearly the best thing about super for this group. And the worst thing? The frequency with which the goalposts move. John says people are expected to lock this money away for up to 50 years, yet the federal government changes the rules every 18 months or so.It is speculated that tax-free retirement income might now be under threat, something John says would "take the jam off the bread" for retirees of lesser means than he.Meet the participants in our SMSF Vox Pop.ROBYNStarted fund 2010Age 57Starting balance $130,000Current balance $220,000Fund members TwoCivil celebrant Robyn O'Connell says she and her husband, David Nugent (pictured, above), a former accountant, became disappointed with their previous super funds."We both lost a lot [in the GFC]," she says, as did her mother. "We didn't want to have our money in shares any more. We wanted to have it in property."The couple, who had one investment property outside super, set up an SMSF, borrowed to buy another house and plan to buy a third, with the aim of paying them off by the time they retire."We expect the two houses [in super] to be worth $800,000 to $1 million by then," she says. "We'll sell those, buy a place we want to live in, have something left over, and keep our current investment property to provide an income stream."There'll also be a small allocation to shares.Looking back, Robyn says $130,000 wasn't really enough to start with. "It meant we had to borrow $220,000 to buy the first house, which is valued at $350,000. It would have been better not to have borrowed, then we wouldn't have had to pay to set up a 'bare trust' [to hold the mortgaged property]. It costs a lot to do that, on top of the set-up costs for the SMSF."Robyn used to be a director of a credit union, where part of her role was compliance, while David is a former accountant who moved into IT, but even then they found running the fund a little challenging at first. "For people who don't have that sort of background, I think it would be very hard," she says."But now that the house is there, it's rented out, we've got good tenants, everything is rolling along." She estimates spending about 10 hours a month on the fund.As for cost, she says it would be about $5000 a year, which she acknowledges is not cheap. That's partly because the "time-poor" couple relies quite heavily on their accountant."But each time we have something done, we try to learn from that and then do it ourselves next time," she says.What's the best thing about having a DIY fund?You hold your future in your hands - not somebody else.What's the worst thing?The compliance - making sure you have everything done properly.DENNISStarted fund 2003Age RetiredStarting balance $1.2 millionCurrent balance $1.5 million ($2.2 million pre-GFC)Fund members Three (with wife and daughter)Dennis established a family SMSF when he retired from an IT career in 2003 because he believed he could achieve a better outcome than a retail fund."After nearly 10 years, I find running the fund quite routine," he says. However, there was some initial effort in setting up the fund and in learning how to use an SMSF program he bought.Dennis started entirely in managed funds from well-known providers, aiming to have a balanced portfolio across the main asset classes."Things went very well until the GFC," he says. "The GFC almost halved the value of our fund and the dividend cash flow dried up."I was very dissatisfied with the results the managed funds achieved during and after the GFC ... so I wrote a new investment strategy and I switched nearly all of the portfolio to direct investment in high-return blue chips about two years ago."That got us out of a nasty situation where we were starting to live on capital. Things are now back on track: we're living on dividends again and the fund's value is recovering. There may necessarily be more strategy changes down the track." It pays to be adaptable, he says.He estimates he spends an hour or two doing the books each month and perhaps a full day at year's end. He pays about $800 to an accountant, an Australian Taxation Office (ATO) supervisory fee of about $200, and an annual software licence of about $400, so a total of about $1400, excluding investment costs such as brokerage.Would he recommend going DIY? "I believe running an SMSF requires nothing more than average intelligence, a bit of effort initially, and being prepared to have a go," he says."I think it's possible to achieve better results than the commercial alternatives with as little as, say, $200,000 in your super balance - and for larger balances I know this to be a fact."But you are taking on a big responsibility and there will be anxious moments, and you have to be prepared to wear this responsibility. You choose the investment vehicles and there are no guarantees."[But] when the GFC decimated my fund, my reaction was to find a better way within the confines of the SMSF structure - not to retreat to a commercial alternative."What's the best thing about having a DIY fund?Being master of your own destiny.What's the worst thing?Being master of your own destiny.JOHNStarted fund 1998Age 61Starting balance $400,000Current balance $7.6 millionFund members Two (with wife)Self-employed as a lawyer all his life, at age 48 John had zero super."In those days, no one had super unless they worked in a big company," he says.But he received a lump sum of $400,000, after tax, when a company he was involved in was taken over. With that, he set up his own super fund."For the past 14 years we've put as much money as we could into super every year," he says, acknowledging that as a high-earning professional he's been able to put in quite a lot.He acknowledges, too, the good fortune of just hitting the old "reasonable benefit limit" only for the Howard government to junk that system and introduce annual contribution caps. This allowed him to keep making contributions."What we've done is try to simulate a balanced fund ... but cutting out the fees," John says of the fund's strategy. Unlike most SMSFs, his has significant money in international shares - about 15 per cent to 20 per cent in overseas managed funds. More recently, he has added exchange-traded funds (ETFs)."One of the advantages of an SMSF is the fund's ability to do things you just can't do in a public fund or another fund with a lot of rules," he says. "Within our fund, for example, we have a reasonably high possibility of doing a 'related-party' investment [which can be no more than 5 per cent of assets]. If one of the [adult] children had a start-up business and it looked like a fantastic investment, we could put $300,000 in without breaking any rules." The industry tends to talk up the effort it takes to run a fund, he says."There's actually very little effort once you've decided your asset allocation." What's the best thing about having a DIY fund?It's the closest thing to a tax haven that exists in this country.What's the worst thing?The constant changing of the rules is a blight on everyone.BILLStarted fund 2010Age 68Starting balance Not disclosedCurrent balance Not disclosedFund members Two (with wife)Bill says he wanted to take a more conservative approach after the GFC."When I looked at cash returns I could get about 2 per cent more, I got 7 per cent when [managed super] funds were paying at the time about 4.5 per cent," he says.His strategy is to split the DIY funds about 50-50 between fixed-interest and income-producing equities.He likes the fact he's able to concentrate on specific shares, whereas a big fund will invest across the market."Basically, I keep to the big banks, the big retailers and Telstra, and I have one mining services company that's done quite well," he says. With 10 or so equities in the fund's portfolio, he monitors the sharemarket most days, though he stresses "it's not about capital appreciation but about dividends".More onerous is the effort required on the administrative side. "It's OK now, but I didn't appreciate at first the amount of reporting you have to do," he says. "You have to be quite diligent, making quarterly returns and at the end of the year, providing details for your tax return. But it's not onerous for a person of average intelligence." Apart from brokerage, his costs are $1000 annually, thanks to a friendly accountant. The fund cost about $1800 to establish.What's the best thing about having a DIY fund?The flexibility and the speed with which you can do things.What's the worst thing?The record-keeping.Key points- SMSF trustees say they like the flexibility and control.- But they don't like the rules being changed frequently.- The administration can be challenging at first.- The minimum starting point seems to be about $200,000.The appeal of SMSFsDo-it-yourself funds are being established at the rate of about 100 a day, according to Australian Taxation Office data.As of June 31, there were an estimated 478,263 SMSFs, with 913,550 members.Those DIY funds had $439 billion in assets led by $134 billion in cash and term deposits and $131 billion in listed shares. A distant third was non-residential property at $51 billion.Sixty per cent of members were aged 55 or over, while 23 per cent were aged 45-54. Less than 5 per cent of members were younger than 35.At last count, the median SMSF had about $540,000 in assets, though one in 10 held more than $2 million and one in five had less than $200,000.SMSF members were putting in nearly $2.50 of their own money for every $1 contributed by employers.