21 Jul The changing face of DIY Super
Move over baby boomers, younger Australians are taking to self-managed superannuation funds in ever-greater numbers. While the face of DIY super may be changing, the reasons for flying solo remain the same. Flexibility and control are the main drawcards, along with falling set-up costs.
The latest statistics from the Australian Taxation Office show that the number of trustees aged under 55 has grown significantly. Of SMSFs established in 2014, 71 per cent of members were under 55, up from 51 per cent in 2010 and 65 per cent in 2013. And the trend is expected to continue.
At the same time more women than men have set up SMSFs in recent times, particularly in the 35-44 age group. This is at odds with the long-held image that all SMSF trustees are wealthy older men. At June 30 last year, there were 65,771 female members in this age group versus 63,517 men.
Some of this change can be explained by the fact that Gen Y and younger Gen X have had superannuation since they started work, so many have built up a reasonable sum in their super by their mid to late 30s. As a result, they now want to take advantage of the flexibility and control that an SMSF can offer. There is also much easier access to information now than there was 10 or more years ago, and coupled with a desire to have greater control over their assets, this may explain the trend.
Not only can you invest in a wider range of assets in an SMSF, but you have control of when and what you buy or sell, although this can be a tricky area for trustees of a SMSF, explored further on.
Another driving force for SMSFs is that when markets perform weakly, many Australians believe they can do better by themselves and benefit from the lower fees.
Lower fees and the potential to outperform big super funds may prove particularly appealing for women who have forfeited years of superannuation contributions while they raise a family. It’s a chance to catch up.
But it is worth remembering that SMSFs can just as easily perform badly in any given year. Just because you have control, it doesn’t mean you are guaranteed positive returns.
In fact, some SMSFs may make the mistake of holding too much money in cash and not enough in growth assets like commercial property and international shares. In the current investment climate with the volatile stockmarket this may seem attractive, but cash rates are hardly setting the world on fire.
The rule of thumb is that you need a balance of at least $200,000 in your fund to make it cost effective.
While it may cost as little as $200 to buy an off-the-shelf trust deed, which is the main set-up cost, annual running costs average about $2500 depending on whether you do your own investing or get advice. However, it is our advice that if you are considering a SMSF to avoid off-the-shelf trust deeds as they can be littered with useless and broad clauses that could work against you. The ATO is constantly reviewing rulings in this space and having a proper trust deed under the care of a specialist is the best option for quality and control rather than cost. We can help you with this, just let us know.
Of course if you know your SMSF balance is going to grow quickly over the next few years, then you may choose to accept higher relative costs in the early years.
One of the key advantages of SMSFs is investment choice. If you want to borrow to invest in property inside super, for example, then a self-managed fund is the only way to go.
You may even be able to borrow money to fund your investment using what is called a limited recourse loan. The advantage of this type of loan is that other assets in your fund are not affected if you fail to meet the repayments. Of course, seek advice on what might work for you and what you’re looking to do with your investments.
For those in their 30s and 40s, the longer timeframe till retirement can make borrowing to invest in property a good strategy. Do make sure though that your portfolio is diversified and you have sufficient cash flow in your fund to finance the mortgage repayments.
Things to be aware of
As the trustee of a SMSF there are a lot of responsibilities you need to take on and manage – your primary concern being the management of the fund for the benefit of members for their retirement.
You are responsible for ensuring your fund is properly managed and complies with all rules (including super laws and the fund trust deed). These rules apply to you in your capacity as a trustee of the fund.
You will also need to make important decisions that may affect the retirement savings of fund members.
All trustees are equally responsible for managing the fund and making sure it complies with the law. This is the case even if:
- one trustee is more actively involved in the day-to-day running of the fund than the others
- you use a professional to do certain tasks on your behalf – for example, an accountant, lawyer, investment adviser, super fund administrator or tax agent.
If you breach your responsibilities as a Trustee there are severe penalties.
Running a SMSF is not for everyone, despite the potential. It’s a long-term commitment and ultimately the responsibility for making sure your fund complies with the rules rests with you.
We can help you uncover whether a SMSF is right for you and what your options are, as well as advising investment options and strategies to make the most of your current managed/industry super or SMSF. Give us a call on 02 9633 5530 today.