The number of Aussies ditching retail, industry and company funds to fly solo – to take up the option of a self-managed super fund – continues to climb exponentially. Today, over 840,000 Aussies own a DIY super fund, and the total amount of wealth tied up in DIY funds is a staggering $420.6 billion, over a third of all money invested in super countrywide.
Back 14 years ago there were just 110,000 DIY funds, managing less than 10% of all super money. Fast track today, and there are over four times more, at 440,000. Over the 12 months to December 2010, more than 29,000 new SMSFs were created.
So what’s the secret? Why are DIY funds so damn attractive?
One reason for the boom in DIY super is the recent tax changes that made super tax free for people over age 60. All of a sudden, Aussies were selling harbourside Sydney mansions and Bowral country retreats to shovel the lot into super (it’s worth noting that you cannot sell or transfer a residential property into a SMSF as a non cash contribution).
Others liked the thought of using their super to invest in commercial or business property, artwork, collectables, or direct shares.
One of the most alluring features of DIY funds is that you are in control; and that’s rather comforting for those disheartened, or plain distrusting, of financial institutions – those who have been scared off by scandals, crooks, high fees or poorly-returning funds. Others simply want to be in the drivers seat on the road to retirement. And who can really blame them.
Most Aussies share a DIY fund with a spouse (68%), and nearly a quarter (23%), are single-member funds. Less than 10 per cent of DIY funds have three or four members. The maximum number of family members allowed in a DIY fund is four.
About half of DIY funds have close to $1 million invested, and 10 per cent hold over $2 million. About 27 per cent of all SMSFs hold between $20,000 and $500,000 in fund assets.
So how much does one need to set up a DIY fund?
Well, $100 would suffice in theory. Just like most industry or company funds, there’s no minimum amount of money that you need to invest. Having said that, financial advisers like to stress the magic number of $200,000 because after fees, and the work and time in managing a fund, advisers think that you need at least a couple of hundred thousand to make it worthwhile.
But that doesn’t stop 30,300 SMSFs in Australia that hold less than $50,000 in assets. (Using data from December quarter 2010, around 66% of new SMSF trustees are under the age of 55, and 35% are under the age of 45).
And indeed, if you enjoy investing and are using DIY super as an avenue to build wealth, then it could be argued that you could start with much less than the $200,000 figure; provided, of course, that you understand the work involved each year, and the importance of understanding super laws, tax and reporting. You’d also want to be confident that you can beat the professionals at the sharemarket game.
The downside of starting on a low account balance is of course the fees. It’ll cost you anywhere from $500 to $3,000 (or more) to set up a fund, and between $1,000 and $5,000 each year just to maintain it. And here, we’re just talking about administration fees – and not the fees incurred in buying managed funds within your DIY fund, transaction costs in buying and selling shares and so on.
Say, you’ve got a low balance of $40,000 to invest into a DIY fund, and you spend the minimum amount to set it up and maintain it each year. In the first year, you’re essentially paying 2.6 per cent in fees. If you instead had $200,000 to invest, the annual fee will tumble to 0.5 per cent.
Clearly, the costs of running a DIY fund depend on whether you get advice from a financial planner or professional DIY services company, or whether you simply rely on your accountant to do the basic administration.
But before you launch into setting up your own fund, find out much you currently pay in fees for your super whether it’s an industry fund, retail, public sector or company fund. If you’re not paying too much and fund performance on the whole has been good, it may be more convenient to let the professionals do the dirty work of investing for you.
This is for general information purposes only and does not constitute investment advice. Please see a financial adviser before making any investment decisions.