Chapter 1: Why DIY?
It is more than 20 years since compulsory superannuation was introduced in Australia, plenty of time for motivated investors to kick the tyres, look under the bonnet and take a fund or three for a test run. Increasingly, they are turning their backs on big public offer funds and striking out on their own.
Self-managed super funds (SMSFs) are the fastest growing sector of the super industry and it’s not hard to see why, after the dismal returns of the average super fund in the wake of the global financial crisis. But the appeal of self-managed super goes deeper than that.
There are close to half a million self-managed funds in Australia, with almost one million members. The typical SMSF is a mum and dad operation but that doesn’t mean they are small fry. Collectively, the self-managed sector has more than $474 billion in the kitty, almost one-third of the nation’s super assets (1).
As the super system matures, self-managed super balances are growing faster than mainstream funds, women are almost as likely to DIY as men, and the age profile of members is getting younger. The median fund balance was $539,486 as at December 2012 and in a positive sign for the future, 40% of new funds established were by people under 45 with their peak earning and saving years ahead (2).
Impressive as these figures are, “I’ll have what she’s having” is not a good reason for starting your own fund. The decision should be based on an assessment of your financial situation, goals and preferences.
So why DIY?
Numerous surveys have shown that the number one reason people give for starting their own fund is control. This is followed by flexibility, a belief that they can do as good a job or better than a public offer fund, tax benefits and lower fees.
The Australian Taxation Office (ATO), which regulates the self-managed sector, also has some advice for anyone considering striking out on their own. It recommends you get professional advice before you take the plunge and be open to seeking advice as needed once your fund is up and running. Self-managed super can get complex, so the Tax Office also suggests you make sure you have the assets, time and skill to make the best investment decisions and meet all your legal and financial obligations.
So let’s take a closer look at some of these issues to help you work out if DIY is for you.
Control. As trustee of your own super fund you have the power to ensure that every decision you make is in your best interests, not the interests of the majority. You get to choose which investments to buy and sell as well as the timing. This can have significant tax advantages because it allows you to schedule income and capital gains and losses at a time that suits your personal requirements. But that doesn’t necessarily mean you need to do everything yourself. A recent survey by Rice Warner Actuaries (3) found that self-managed fund trustees value strategic advice and are willing to pay for it. What they don’t want is an adviser who pushes their own products. To successfully run you own fund you need a certain level of financial sophistication because even if you use advisers ultimate responsibility lies with you.
Cost. To be competitive with other types of funds advisers recommend you have at least $200,000 to invest. If you start with less you need to be confident you have the ability to boost your balance fairly quickly. This is because the cost of running your own fund diminishes as its value grows. The ATO suggests ongoing costs are about $2000 to run a median-sized fund, including $180 for the annual supervisory levy. The actual cost will depend on the amount of advice you pay for, the type of investments you make and transaction costs.
Flexibility. Not only do you have a free hand in selecting what and when you buy, but the opportunity to invest in assets that public offer funds are unable or unlikely to offer. If you want to hold direct property in super, then a self-managed fund is the only structure that allows it and you can use borrowed funds to do it. Small business owners often choose to hold business property in their own fund which has major tax benefits once they retire. In addition to major asset classes including shares, listed property and fixed interest, self-managed funds can also invest in direct bonds, term deposits, instalment warrants, boutique managed funds and initial public offerings. Self-managed funds also have the ability to react quickly to changes in the super rules and opportunities arising from new tax strategies
Bespoke tailoring. You might like the some of the investment options offered by a public offer fund but not the pension product or the insurance offering. The beauty of breaking away from the herd is that you can unhook your investments from a particular fund manager and tailor a seamless investment strategy that will take you from set-up into retirement. You can also change advisers without having to switch funds or products. Many advisers are tied to investment platforms offered by a particular institutions, so changing advisers can mean switching super accounts and triggering capital gains tax and other costs.
If you think a self-managed fund is the right retirement investment solution for you, then look out for the next instalment in this series. It will explain how to set up your own fund.
- APRA Statistics, December 2012
- ATO, SMSF Statistical Survey December 2012
- Rice Warner Actuaries, November 2012