Self Managed Super Funds:

What does "self-managed" really mean?

"Self-managed" means exactly what it says. A self-managed fund is run by you for you.

It's possible because you can:

(a) be a trustee; or

(b) be in control of the trustee; and

(c) be a member/beneficiary of the fund.

For the purposes of this brief we are concentrating on funds with less than 5 members - funds which have been defined as "excluded funds" under the Superannuation Industry (Supervision) or "SIS" legislation.

The members of these funds will almost always be family or close business associates. In fact APRA (Australian Prudential Regulation Authority) sometimes refers to these funds as "family funds".

Generally, however, the structure of a self-managed fund is essentially the same as a fund managed by an institution.

Except of course, for the fact that you're in control of the fund and, therefore, your financial destiny.

Who can have a self-managed superannuation fund ?

"Just about anybody" is the simple answer to this question.

This would include:

Anyone who is under 70 years of age, employed for more than 10 hours a week and earning an income from that employment.

Anyone who already has money in another superannuation fund, Approved Deposit Fund or any other form of roll over investment.

You could be:

an employee;

self-employed;

a director of a private company;

about to receive a retirement or redundancy package;

already retired with money in a roll over fund; or

retired and already receiving a pension from a private superannuation plan,

It's important to remember, though, that a self-managed fund may simply not be a cost-effective way for you to go. This may be due to practical considerations such as insufficient funds or contribution levels.

Generally speaking, when does a self-managed fund become cost-effective ?

As a general rule of thumb, the Australia Taxation Office has advised that it considers a person that has a balance of approximately $300,000 in the superannuation environment or can make substantial contributions to superannuation, could be seriously considering a self-managed fund.

It's at this point that the savings you may make on management charges and fees become really significant.

How much will it cost to establish my fund ?

You should be able to establish a standard 1 to 4 member fund for between $400 and $600.

How much will it cost to maintain my fund ?

Complying with the governments annual requirements usually costs around $900 including the APRA lodgement fee.

We can give you a more exact idea of costs as they apply to your individual situation.

As they say "Time is money".

How much time will I need to spend managing my fund ?

Naturally, the answer to that question will vary from person to person. We can say, however, that most people are surprised at how little time is actually required.

On the other hand, many people, especially retirees, discover that they enjoy studying investment markets and considering their options and find that they quite voluntarily spend more and more time in active control of their fund.

Consider, too, that you can always call upon the assistance of a professional adviser.

Naturally, you'll want to think about the monetary and "lifestyle" value you put on your own time. You may well find, however, that the time you spend is more than a worthwhile investment both in purely financial terms and the feeling of being in control that you gain.

Mechanics of Operation

You have indicated that you are considering establishing your own self-managed superannuation fund.

The primary objectives of this strategy would be control, flexibility and tax effectiveness. Having your own fund will allow you to select appropriate investments (with our assistance) to maximise the return on your superannuation assets. Investment options include Australian and International shares, property, managed funds, fixed interest and cash.

You will have the flexibility to contribute to your fund according to your timetable, availability of funds etc.

Both a Trust Deed and a Cheque Account will need to be established for a self managed superannuation fund.

The cost of the trust deed is $460. We will establish the trust deed and arrange for transfer of the superannuation assets. This service will be provided at an hourly rate of $200. In addition, ongoing compliance work by accountants will be required.

In a nutshell, what are the advantages of managing my own fund ?

Control

The major advantage of a self-managed fund is control. That is, you choose how your assets are invested, you monitor how those investments perform and you make investment decisions based on that knowledge.

With a fund that's managed for you, you often have no day-to-day knowledge of how investments are performing and you have no input into investment decisions. You are, in other words, "along for the ride".

Flexibility

As you have total control of your fund, you'll be able to consider a range of investments that suit you. You'll be able to switch or modify those investments as you see fit. And you'll be able to make "corrections" to your investment planning quickly.

You can link your fund with your overall financial plan. For example, your self-managed fund can be used for both accumulating assets during your working life and for income during retirement.

Indeed, there are many specific financial planning strategies that require the use of a self-managed fund.

Furthermore, when you reach retirement age there is no need to close or "wind up" the fund. The reason, very simply, is that you can become a pensioner of your own fund and retain the assets in their current form if you so desire.

Investments for a Self Managed Fund

When deciding where to invest funds within a self managed superannuation fund, there are two ways to invest - directly or indirectly. Direct investment may be made by purchasing shares in a company on the stockmarket through a stockbroker or a direct property purchase. Indirect investment is with a professional fund manager.

When investing for the medium to long term a more constant performance is achieved by adopting a diversified portfolio approach. This is where investments are made across the asset sectors ie. cash/fixed interest, shares, property and overseas.

Diversified portfolios perform more consistently because the sector cycles normally do not coincide. For instance, as the performance of fixed interest declines, shares and/or property improves. Or it may be that when the performance of Australian markets in general is weak, the overseas sector performance is strong.

In a diversified portfolio the fluctuating performances of the various sectors should compensate for each other to produce a consistently positive overall result. This is the essence of diversification of an investment portfolio.

The investor’s time frame and attitude to risk are important considerations when selecting an appropriate investment portfolio. I have outlined below a number of asset allocations (Capital Secure, Conservative, and Balanced) that can be used as a guide when structuring your investment portfolio.

Capital Secure Portfolio

The capital secure portfolio is appropriate for an investor who does not wish to take any investment risk. Conservation of capital is the primary objective. This type of portfolio is also appropriate for investors who have a very short investment time frame and require funds at short notice.

Funds are generally deposited with large financial institutions such as banks. Because of the relatively low risk these institutions do not need to offer high rates of return to attract funds. In the current economic environment the returns are around 5% per annum.

A typical Capital Secure Portfolio would be invested wholly in cash and fixed interest.

Conservative Portfolio

The conservative investor is concerned with maintaining the capital value of assets. They are not comfortable with a high level of volatility in the short term. Hence, they tend to have a greater proportion of their assets invested in cash and fixed interest securities. Fixed interest securities include government bonds and debt instruments issued by large corporations. These generally have a low credit risk and are considered relatively secure.

Exposure to equity investments provide a hedge against inflation. Where the share market is involved it is usually invested in larger, more mature companies. However, any equity investment will experience fluctuations in the capital value over the short term. An appropriate investment horizon for a conservative portfolio would be a minimum of 2-3 years.

Balanced Portfolio

A balanced portfolio is suitable for those investors who are prepared to accept a moderate degree of risk given the potential for increased returns. Hence, a balanced portfolio will have a greater exposure to the share and equity markets.

A small portion of total assets may be invested in companies listed on foreign stock markets. Fixed interest securities are included to provide stability of returns. Due to the increased exposure to equity investments, a suitable investment horizon would be from the medium to long term (3-5 years).

An example of a Balanced portfolio is outlined below:

As you can see by shifting the weighting’s from cash and/or fixed interest towards equity investments the potential returns increase but so does the risk of a fall in the capital value in the short term. The capital secure option should provide the greatest security but have the lowest returns of the three portfolios. The balanced portfolio should have the greatest returns but will experience greater volatility in the short term.

How we can help

We can provide a free financial assessment to see how long your superannuation will last when you retire. You will probably be surprised.  We can also show you some options about what to do if you are not happy with how long your superannuation will last.  We can educate you and answer your superannuation questions if you contact us.

Prepared by John Hehir FAA Financial Advisers Australia