Managing your own super

Even before super funds took a nosedive with the global financial crash, the number of Aussies venturing into Do-It-Yourself super funds was around 2,500 a month! This number is expected to grow with annual returns from funds for 2008 going deep into negative territory.

The recent 18.7% rally of the S&P/ASX 200 over 20 days is bound to help super returns this year, but there are still a number of burnt super members who might be saying: "Hell, I could do better than these dummies managing my super."

If this sounds like you, be warned that DIY super can be a great option for some people and a disaster for others.

The right fit

Let's do a profile of someone who might be a good home-based fund manager.

You should be organised and great at attending to jobs without fail. You have to be a rule keeper and willing to read about how you become a successful fund manager.

You will need to immerse yourself in market and money news and tips. You should be reading this column or at least ones like it.

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 buy advice from financial advisers while others buy books, go to ASX lectures, or ones like them, and generally pay the price to be a good self-adviser.

Okay, that's the kind of person you need to be, but what about the rules and jobs that will define your new life as your own fund manager?

SMSF explained

The DIY fund is really called a self-managed superannuation fund or SMSF and it can only have four members. Each member is called a trustee, which means they need to know their tax and legal obligations.

There are rules for how the fund is structured, what it can buy, the records that must be kept and there are also reporting requirements. This is serious business and you have to be up for it to do it right.

How much?

Some people start with a smaller amount, but ASIC thinks the costs of a SMSF means you should have $200,000 to kick off.

Set up costs using an accountant will be around $1,000 and you could pay $1,500 a year to meet official obligations. If you are thinking about going DIY, talk to an accountant to get an idea of your payments to him/her and others.

You will also have 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%, and on $200,000, that would be $2000. On $500,000, it would be $5,000.

Prepare a strategy

Your fund has to have a stated investment strategy, which should be linked to the retirement goals of the members. This 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% of the funds in Australian shares, 20% in fixed interest securities and 10% in cash.

This would be an aggressive fund programmed for growth. More conservative ones might have 40% in shares and 50% in fixed interest securities and 10% in cash. Property can also be an asset you can hold in your fund and this can come via a direct holding or through property investment trusts.

A few rules

There are a number of concerns for the tax office, which run SMSFs. The first 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% of 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.

Keep this in mind

There are other rules that many 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 your tax-advantage status of being slugged at only 15%.

Some people who have broken the rules have seen their investments re-taxed at the usual rates, which can be as high as 45%!

Another stress point can be for the person who is given the job to run the fund. He or she has to keep the other members informed and get support for changes to investments.

Watch your exposure

Getting the SMSF experience right is not all that hard but it takes dedication to the important task. I think getting the investments right is critical. One guy told me his $1 million SMSF dropped to $300,000 because he had his fund in seven great blue chip companies. I believe you should hold at least 20 stocks to give you only a 5% exposure to each company and you should not hold more than 70% of your assets in shares unless you are a thrill seeker. But if you are a conservative thrill seeker, 60% exposure to shares might be the go.

Click here to visit Peter Switzer's website

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