Consider the risks and benefits before going DIY.
By Peter Switzer
Even before super funds took a nosedive during the global financial crisis, the number of Australians venturing into do-it-yourself (DIY) superannuation funds was about 2500 a month.
Mediocre returns generated in industry and commercial funds prompted a number of people to think, “I could do better than these dummies managing my super”.
Before you take the big step, though, be forewarned: DIY super, while a great option for some, can be a disaster for others. Review the steps below to determine whether you’re a good candidate for managing your own super.
1. Make sure you’re the right fit
Let’s do a profile of someone who might be a good home-based fund manager:
• You are organised and great at attending to tasks without fail
• You are a rule keeper and willing to learn about how to become a successful fund manager
• You immerse yourself in market and money news and tips
• You read financial columns on a regular basis
2. Become a self-adviser
If you can’t see yourself becoming a market expert and self-created financial adviser to yourself, you will need to seek help.
Some DIY-ers pay for advice from financial advisers while others buy books, go to Australian Securities Exchange (ASX) lectures or similar, and generally pay the price to be good self-advisers.
3. Know your SMSF rules
The DIY fund – technically a self-managed superannuation fund or SMSF – can only have four members. Each member is called a trustee, which means each person needs to know their tax and legal obligations.
There are rules for how the fund is structured, what it can buy, and the records that must be kept. There are also reporting requirements. Managing a super fund has legal and tax ramifications and managers must be up to the task of doing it right.
4. Prepare your finances
Some people start with a smaller amount, but the Australian Securities and Investments Commission (ASIC) believes the costs of a SMSF means you should have A$200,000 to kick off.
Set-up costs using an accountant will be around A$1000; meeting official obligations could mean an additional A$1500 a year. It’s advisable to talk to an accountant to get an idea of the costs before going DIY.
There will also be payments to stockbrokers if you buy shares, and it’s likely that you will. If you use a full-service broker, the payment could be 1 per cent, and on A$200,000, that would be A$2000.
5. Prepare a strategy
Your fund has to have a stated investment strategy, which should be linked to the retirement goals of the members. The strategy should outline how the money in the fund will be allocated between acceptable assets. For example, the SMSF’s members might agree to have 70 per cent of the funds in Australian shares, 20 per cent in fixed-interest securities and 10 per cent in cash.
This would be an aggressive fund programmed for growth. More conservative ones might have 40 per cent in shares, 50 per cent in fixed interest securities and 10 per cent in cash. Property can also be an asset held in your fund and this can come via a direct holding or through property investment trusts.
6. Follow a few rules
The Australian Taxation Office, which oversees SMSFs, has a number of areas of concern.
One is linked to trustees putting personal assets into the fund, such as houses, which are then rented to a trustee.
Problems arise with collectibles, like antique cars and artwork, and advice is needed in this area. By the way, 5 per cent of the fund can be used for these unusual investment assets.
Investments need to be at arm’s length and must pass the sole purpose test. A super fund’s sole purpose is to provide benefits to the retiree when retirement comes around. Benefits are not to be enjoyed pre-retirement.
7. Know your obligations
There are other rules that DIY-ers break, such as accessing cash out of the super fund when times are tight. This is against the law and it could lead to prosecution. You could also lose the tax advantage of being taxed at only 15 per cent.
Breaking this rule can be expensive: some violators have seen their investments re-taxed at the usual rates, which can be as high as 45 per cent!
Another stress point can be for the person who is given the job of running the fund. They are responsible for keeping the other members informed and getting support for changes to investments.
8. Watch your exposure
Getting the SMSF experience right is not all that hard but it takes dedication to the important task. Getting the investments right is critical.
You should hold at least 20 stocks to give you a 5 per cent exposure to each company and you should not hold more than 70 per cent of your assets in shares unless you are a thrill-seeker. If you are a conservative thrill-seeker, 60 per cent exposure to shares might be the way to go.