Running your own super fund appears an attractive proposition, but it requires diligence to generate the year-on-year returns required for a comfortable retirement. The long investment road to retirement success is full of potholes that can easily bring investors unstuck and keep them working for longer. Simply, untimely investment decisions can mean some self-managed-super fund trustees can’t afford to retire.
The past 12 months has provided a wake-up call to all super fund members as the rapid decline in global equity markets stripped billions of dollars from collective retirement nest eggs. Some approaching retirement have shelved plans to put their feet up and are pinning their hopes on a global recovery in financial markets to restore retirement savings to pre-credit crunch levels. If nothing else, the credit crunch has provided a sobering reminder that positive double-digit returns don’t last forever, and members should take much more than a passing interest in superannuation performance. Too many people only take an interest in super when their fund posts a negative return, or they’re approaching retirement. Apathy carries a cost.
And it can be a hefty cost for SMSF trustees who don’t put in the time, or have the inclination to work their fund after establishing it. Setting up a super fund is no more than that. Growing the fund, while meeting legal and administrative requirements, in what can be volatile investment markets requires careful planning, research and, often, financial advice.
Superannuation experts say SMSF trustees failing to meet the sole purpose test are inviting scrutiny from the Australian Taxation Office. Finance planner and investment adviser Gerard O’Shaughnessy says using a super fund to buy a holiday house for private use generally doesn’t meet the sole purpose test, particularly if the trustee is under the age of 55 and still working. Nor does buying paintings for personal enjoyment, or paying golf membership fees. A holiday house may be part of an SMSF if it’s generating income. He says the underlying objective of the sole purpose test is to build retirement savings. O’Shaughnessy, of Carroll, Pike & Piercy, says trustees found to deliberately breach the test face stiff fines and can lose their generous tax concessions. And, he warns, that super contributions could also be taxed at the top marginal rate. The ATO frowns upon SMSF trustees who deliberately breach the sole purpose test. O’Shaughnessy says those considering setting up an SMSF must subject their accounts to an annual accounting audit.
O’Shaughnessy says the big challenge constantly facing SMSF trustees is asset allocation. It’s easy to get it wrong, particularly in today’s volatile markets. A portfolio requires regular reviews if a trustee chooses not to seek the services of professional financial planners. O’Shaughnessy says: “One of the most important decisions SMSF trustees will make is asset allocation because it will dictate returns going forward. And asset allocation must match an investor’s risk profile and take into account personal circumstances. If you’re three years off retiring, then you don’t aggressively expose your portfolio to growth stocks. And just about the reverse applies if you’re in 20s or 30s – you don’t fill a portfolio with cash and fixed interest. Finance planners spend a lot of time building balanced portfolios that suitably match a client’s risk profile.” O’Shaughnessy says a fund’s share portfolio can become lopsided if SMSF trustees fail to pay attention to weighting. Depending on sharemarket performance, a trustee can become overweight in some stocks – whether it be the big banks or BHP Billiton – and underweight in others, such as defensive income stocks. A fund’s share portfolio often needs tweaking to keep it diverse and appropriately weighted to spread risk. Those investing in overseas funds need to be up to speed with fund performance, favourable equity sectors, company and economic outlooks, interest rates, exchange rates and other external factors. O’Shaughnessy warns that “currency risk becomes a major factor when investing offshore”. Exchange rates will have an impact on returns.
O’Shaughnessy says SMSF trustees should not let their emotions cloud their judgement. When share prices are falling, it can be tempting to liquidate a portfolio for the safety of cash and fixed interest. “The worst thing you can do is panic,” O’Shaughnessy says. “In any market, whether it be trending up or down, investors should regularly question whether their equity or property portfolio is meeting long-term objectives. And superannuation is a long-term investment. Those who sell quality stocks on short-term under-performance risk missing the upside when markets recover – and they will recover. Too many investors buy at the peak and sell in troughs when the reverse should be happening.”
Alex Dunnin, of financial services researcher Rainmaker, says inexperienced SMSF trustees can lose by investing too much money in elaborate property projects they know little about. Promises of fantastic returns must be treated with the utmost caution. Dunnin says it’s a mistake to set up an SMSF purely for tax considerations, such as borrowing to invest. Some people focus so much on tax concessions that they actually forget about investment performance. After setting up a fund, some trustees forget to invest and leave it in cash. He says novice trustees start complaining about “relatively simple” compliance rules to sooth their frustration when their fund is under-performing.
Dunnin says: “Superannuation is not about tax breaks; it’s about building savings for retirement. And the reason for setting up an SMSF is that you believe you can do a better job than professional fund managers. And some SMSFs out-perform the professionally managed super funds, but it requires commitment and an investment strategy. SMSF trustees should compare their returns with the average generated by other managed funds over five-to-10 years to gauge performance.” He says most of the 330,000 SMSFs across the nation have posted negative returns in the past 12 months. This is because of relatively high exposure to Australian equities. But the professionally managed super funds also averaged negative returns, with the popular default option of the nation’s super funds posting an average loss of about 6 per cent.
Dunnin says investors need about $300,000 in super to make an SMSF a viable proposition when establishment costs, professional advice and annual auditing fees are taken into account. He says the fees of professionally managed super funds generally range between 1 and 1.5 per cent on the amount invested in the fund. He says: “As much as you might dislike fund managers, most actually know that they’re doing.”