Think you can manage your super fund? Think again.
Last year's poor investment returns have people thinking about their superannuation. No one likes negative returns, but if the market downturn prompts greater individual scrutiny of super, it may be a blessing in disguise.
Unfortunately, many Australians have chosen to ignore the message. Some, believing almost anyone could do better than the professional fund managers and super funds, have decided that a self-managed super fund or a DIY super scheme are the way to go.
There is no question that for some the do-it-yourself option is appropriate. But for many small-business owners, self-employed people and other DIY candidates, it is vital to first take a reality check.
For ensure running your own super fund is effective, you need to:
Have enough money to make it cost-effective.
Understand the rules and options.
Have expertise and willingness to monitor your investments strategies.
As a rule of thumb, an investor would need to have about $300,000 for a self-managed super fund to be cost-effective. An Association of Superannuation Funds of Australia study found DIY super funds are, on average, dearerthan retail funds and are much dearer than corporate, industry and public sector super funds.
Workplace and retail super funds can use economies of scale and market knowledge of fund trustees to reduce costs. The ASFA survey found that, on average, self-managed super funds have annual running costs of 1.8 per cent of assets, compared with 0.5 per cent for public sector funds, 1.3 per cent for corporate or industry funds and 1.3 to 3 per cent for retail funds.
To run your own super fund, you must be the trustee of the fund and understand all the super rules. If anything else goes wrong, you are personally liable. If the fund has not been managed according to the rules or you have not kept up with the paperwork, you may also be liable for a tax penalty.
An audit by the Taxation Office, which administers self-managed funds, found that up to 50 per cent of DIY funds made compliance errors, including failing to develop an investment plan and breaching the "sole purpose" test. The money in a self-managed super fund must be invested only to provide benefits for the beneficiaries of the fund. A DIY super fund cannot borrow, lend, or buy and sell real estate to related parties.
Many of those opting for self-managed super start off with good intentions but fall victim to procrastination. If you do not get around to investing, you can miss out on investment opportunities.
It is also important to spread investment risk. Diversified investments, such as those usually on offer in a super fund's balanced option, which include Australian and international shares, property, alternative investments, bonds and cash, generally deliver better results over the longer term.
Many people are motivated to set up their own fund so they can control what happens to that money. But you can only control your DIY fund if you fully understand the rules, and have the necessary investment expertise and the time to devote to managing your self-managed fund.
The costs of running your own super fund include:
Establishment costs. It costs $300 to $2000 for a pre-prepared standard trust deed.
Annual administration costs. It costs from $1500 annually to have a large self-managed super fund administrator look after a fund.
If you decide to look after your own investments, do not forget to include the transaction costs of buying and selling assets.
Compliance obligations and costs. Accounts must be audited each year. You need to factor in accounting and audit fees, including preparation of annual accounts, the fund's tax return, and an annual Tax Office lodgement fee, totalling at least $1700.
Philippa Smith is the chief executive of the Association of Superannuation Funds of Australia.
For a copy of the ASFA report, visit www.superannuation.asn.au
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