Self-managed super appeals to people who want flexibility and control, and reduced management fees.
Move over baby boomers, young women are the ones into selfie super funds.
More 20 and 30-something women than men the same age run their own superannuation funds, and Tax Office figures show that together they outnumber pre-retirees, who you’d think would be the keenest.
So why are they turning their backs on the big funds, some of which seem to have been around forever?
Robert Nicholls started his own super fund when he was 30 to ditch the management fees. Photo: Anthony Johnson
“Overwhelmingly people go into a self-managed super fund for flexibility and control. It’s not about fees and so on,” says Bryce Doherty, head of UBS Asset Management, who, with the Financial Services Council, recently surveyed 601 selfie owners.
The costs of setting up your own fund are falling, too.
If you go to a self-managed super fund specialist rather than an accountant, you can pick up a trust deed, the main set-up cost, off the shelf for as little as $200.
Running costs average around $2500 a year but depend on whether you do the investing yourself or get advice. A handy summary of who offers what online for how much is at www.thesmsfreview.com.au.
While it’s generally accepted that a selfie with $500,000 can be run more cheaply than even low-cost industry funds, it all boils down to how much is invested where and what services are outsourced to third parties, such as financial advisers and accountants.
Whether selfies do better is a moot point.
A cashed-up selfie, for instance, would have done better than most balanced funds one year but lagged the next. Who’s to say which year is the more representative?
Perhaps a telling point is that only 7 per cent of the selfies in the survey beat the average industry-wide return last financial year, down from a still not exactly reassuring 17 per cent the year before. It just goes to show there are good and bad years in selfie land, just as professional fund managers experience.
Fund managers at the big end of town knock selfies, as they would, for putting too much in term deposits and/or Australian shares and too little in international shares, commercial property and bonds.
That may be true but what selfies miss on the roundabout they gain on the swings because they may well be saving money on fees.
Unfortunately in the low-return world that is our lot for the next few years, fees will make all the difference. Today’s 30 year olds will lose one-quarter of their final balance from the average fund investment fee of 1.2 per cent, according to the Grattan Institute.
Still, dumping everything in term deposits and shares isn’t diversifying, and you’ll be short-changing yourself by not looking at other investments if for no other reason they’ll make your super safer overall. Some advisers even suggest holding a small amount of gold – no more than 5 per cent of your fund – because it has a life of its own.
While you don’t want to be flitting from share to share – trust me, you’ll end up selling too cheaply and buying too dearly – or one asset to another, your investment portfolio should be based on your age and finances outside super.
Even then it only needs tweaking from time to time. The cardinal rule is to keep your mitts off your portfolio.
Bear in mind that in your 30s, for instance, you want most if not all your super in growth assets – shares, property and the like – while close to retirement, you might tone it down a bit with some bonds, cash and annuities.
Oh, and if you think a selfie would be perfect for housing jewellery, rare coins, artworks and anything else that’s nice to have and likely to appreciate in value, I’m sorry. To get past the Tax Office wowsers you have to argue they’re essential items for your retirement, not for today’s enjoyment. Even if you pull that one off you’ll have to keep them under lock and key somewhere you can’t see them because, remember, you’ve just sworn they’re for your retirement. Oops.
Nor is a selfie a fast-track to getting your super early. The rules for do-it-yourself schemes and any other super savings are the same, only selfies have more of them.
Although flexibility and control, which boil down to having more choices more often, are the most common motives for starting a selfie, there are better reasons.
After all, some large funds such as AustralianSuper offer an option where you can choose and trade your own shares and term deposits. For small balances that is cheaper, with a lot less rigmarole, than running a selfie, which must have its own bank account, trust deed and auditor among other impositions.
A public fund can also tap into some big, high-return infrastructure projects denied small-time selfies.
The downside, as with all pooled super funds, is that they can’t be tailored individually, don’t have a holistic approach to your investments because they don’t know you from Adam, or Eve, and you can find yourself subsidising a footy team you don’t even follow which, as the Tax Office might say, doesn’t have much to do with your retirement. By the way, non-selfie funds are subject to a different regulator, in case you were wondering.
But the real argument for starting a selfie is it can get you around the rules restricting how much you can put into super and, later on, let you switch seamlessly from working to the pension phase.
Annual salary sacrificing to super is capped at $30,000 or $35,000 if you’re over 50 but your fund can borrow whatever it likes. The only restriction is that it’s a non-recourse loan which means if the investment goes belly up the rest of the fund is ring-fenced from foreclosure by the bank. And no, you can’t have your super fund take over your house mortgage, though a small business is fair game.
There’s a push to close this borrowing loophole – the recent Murray report on the financial inquiry wanted to ditch it – and the government will review it in 2018. You needn’t be put off by that – even the Murray report exempted existing borrowings.
Mind you, it might be closing itself. The banks are reining back investment loans and becoming choosier. They also charge more for selfie super loans because by their non-recourse nature they’re considered riskier.
Also, selfies make it easier to switch from the accumulation to the pension phase. There aren’t a pooled fund’s extra fees, more limited options or capital gains implications built in the exit and entry price in moving from one to the other.
For all that selfies aren’t for everyone. They can be time-consuming and naturally require some investment nous that we don’t all have.
When AMP Capital, an investment manager, commissioned a survey by Investment Trends of its selfie clients, almost one in four said “investment selection was their most difficult task,” closely followed by 23 per cent who cited “paperwork and administration” as a bugbear.
Then again, just because it’s a selfie doesn’t mean you have to do it all yourself anyway. You can use it to invest in low cost index funds – these track a whole market such as the ASX with annual fees below 0.3 per cent – or exchange traded funds (ETFs), which are cheaper still. A few select ETFs, for example, will give you a diversified portfolio of local and global shares, commercial property, bonds and commodities.
The UBS/Financial Services Council survey found that one in five selfie operators didn’t use ETFs because they didn’t know about them. Well, there’s no excuse now.
Gen X super strategy to invest in innovation
Super selfie owners, I swear along with police officers, are getting younger.
Robert Nicholls, a business adviser, was 30 when he started his own super fund after prompting by a colleague that he could ditch the management fees he was paying.
But taking responsibility for his own financial affairs and being able to invest in alternatives probably appealed even more.
“I play a role in funding start-ups. My view is super funds are an untapped area. Not those in the pension phase but at the other end. Gen Xs my age who have good reliable incomes and are salary sacrificing with time on their hands to invest and help drive innovation,” Robert says.
Since he’d just returned “from a jaunt in the UK” and was about to go to graduate school there wasn’t much to start with but it’s proof of the power of compounding that 11 years on “there’s close to half a million in there.”
The trick was to diversify and re-invest dividends back into the market.
“For the first 10 years my primary focus was equities – good blue chips. I knew the company’s dividend re-investment scheme, or using the dividend to buy other equities, was the way I was going to grow the fund. I didn’t have the capital base for property.”
Today he goes for “anything that changes the game. I’m very keen on the share economy such as Uber and GoGet and peer-to-peer lending.”
His most recent investment was in the privately owned Timelio, which is an online site for small businesses to raise money quickly by selling invoices due from customers.
“There are lots of delays for account receivables and small businesses realise the need for working capital to grow,” Robert says.
Investors can earn about 5 per cent a pop – up to 20 per cent annualised – by buying the invoices at a discount and then being paid what’s owed when it falls due. And they don’t have to do the chasing up, either.
Robert liked the idea so much he’s since bought equity in the company as well with his super fund.
“But don’t put all your eggs in one basket,” is his advice to would-be selfie starters.
How to set up your own super fund:
* Find an accountant
* Appoint the trustees
* Ask your accountant to draw up a trust deed
* Sign a trustee declaration
* Name and register your fund with the ATO
* Open a bank account for the fund
* Roll over your super
* Write an investment strategy
* Appoint an auditor
Published in The Age.