For & against | Doing it for yourselfPUBLISHED : | UPDATED:
The case for
■ When you received your superannuation fund statement for this financial year you might have been surprised, and probably disappointed by its slow growth in the past 12 months. The fee deduction may also hurt. If you’re in the driver’s seat, however, you know exactly where the money is being invested and how it is faring.
■ Some say there’s more opportunity for diversification in SMSFs and there are very interesting assets that you can invest in such as art and some collectibles. You can even borrow to invest in some limited instances. Our Meet the Reader couple on page 40, for instance, started an SMSF with the plan of investing in the asset class they liked most – property.
■ Depending on the size of the funds you have under management, there could be some cost benefits to running your own fund. You are, after all, doing away with the fund manager so you should at least save on those costs. According to Financial Review Smart Investor‘s SMSF platform survey, the minimum balance for an SMSF to be cost effective is about $250,000.
■ An SMSF can also help you look after your family if they become members, too, and it can be a useful estate planning tool. There are things you can do in a DIY superannuation fund that you can’t do elsewhere. It can facilitate the tax-effective transfer of wealth between generations but to do that you need to have a thorough understanding of the regulations.
■ Possibly the most appealing aspect of an SMSF for many trustees is that it gives the owner control and the ability to have some say in their own retirement destiny. For investment enthusiasts this control is worth more than any cost savings which is why they sometimes start a fund up with a lower balance than the recommended minimum.
The case against
■ DIY super is all well and good but if you’re not paying a fund to manage your money, it’s going to chew up a fair bit of your time. That’s possibly why the demographics of SMSF trustees are generally skewed towards older, semi-retired types with grown children. If you’re an investment professional, of course, it might be different.
■ Cost can be a positive but it can also be a negative if you don’t have enough funds in your SMSF. It can be hard to keep track of your costs. It won’t be a simple annual percentage fee as it is with most mainstream funds. There will be start-up costs, one-off annual costs for auditor reports and platform fees, along with brokerage.
■ Possibly the biggest disadvantage that many trustees may not initially realise is that the buck stops with them. If you don’t have a thorough understanding of the regulations and requirements and you make a mistake, even if you use an accountant or financial adviser, you’re the one who takes ultimate responsibility. Penalties include making the fund non-complying and having income tax concessions removed, monetary penalties and, in some cases, jail terms of up to five years.
■ As well as time, you need to have a fair amount of investing know-how. It’s not enough to think that the big guys are doing so poorly you must surely be able to do better than that. You need to have a bit of knowledge to back it up. After all, they are professionals and if they can’t manage to outperform the market then what makes you think you can? If you don’t know anything about investing, it’s going to be a very steep learning curve.
■ Diversification is also a “for” but, even with all the different investments that are allowed under the legislation, many SMSFs have a large percentage of their funds under management in cash. This serves them well when interest rates are high, however it also means they may miss out on any equity market rises.
It’s not for everyone but if you have a reasonable amount of superannuation, a lot of time on your hands and an interest in investing, a self-managed superannuation fund could suit you. If you don’t, then you might be better off leaving it in a low-cost industry fund.
Penny Pryor Smart Investor