Many people who start a do-it-yourself superannuation fund often do so for a single reason that is pertinent to their circumstances. They may want to invest in a property from which their business is run or some other asset class that piques their interest, such as shares or art; or they simply may want to run their own investments as they think they can do it better and cheaper than a big fund.
This approach often means they focus on their specific interest while a lot of other issues associated with successful DIY funds are overlooked.
Surprising amount of work
There is so much more to running a DIY fund than most people think, says Olivia Long, chief executive of fund administrator SuperGuardian, especially for busy people.
Just keeping up to date with basic tax lodgement and annual return requirements can keep people occupied, a fact that many trustees who scramble to meet these obligations during February to May will acknowledge.
Even those who employ professionals to help them with various aspects of running their DIY super can find themselves challenged by tasks they are required to perform at strategic times of the year.
Running a DIY fund can be difficult because people tackle the task spasmodically rather than routinely, says Ron Lesh, managing director of BGL Corporate Solutions, Australia’s biggest provider of DIY super fund software. BGL claims that its Simple Fund software is used by 75 per cent of the nation’s 430,000-odd DIY funds as well as many accountants.
Get a system going
Following a routine is probably the most important aspect of having a successful DIY fund, says Lesh, with success measured in various ways: whether you have good administration, a disciplined approach to contributions and proactive investment management.
Running a DIY fund in a way that focuses on issues on either a monthly or quarterly basis is much better than occasional intense management.
The trouble with funds run in a haphazard fashion, says financial planner Matthew Scholten of Godfrey Pembroke in Melbourne, is that people can overlook routine issues that can then lead to problems or missed opportunities.
It is not uncommon for people who set up DIY funds for a particular reason to run out of ideas or, in a worst case scenario, do very little. Like anything that involves investing, says Scholten, the most successful arrangements are centred around planning.
Stages of life
Tod Fankhauser of DIY super administrator Heffron Consulting points to considerations that arise for members at certain ages.
For example, turning 50 during this financial year has some extra value over following years. Until June 30, 2012, a 50-year-old can make tax concessional contributions of $50,000 regardless of their account balance.
After that the government proposes to limit them to $25,000 if they have savings in excess of $500,000.
The important thing is to be 50 before June 30 2012. Even if you are 50 on June 29 you will be able to contribute $50,000 compared with $25,000 for an under-50-year-old.
A disciplined approach to making contributions, says Fankhauser, includes making sure you don’t exceed the contribution limits given the severe penalties that can arise if this happens. Being aware of the circumstances and times when contribution mistakes are more likely is essential.
As an example, making sizeable last-minute contributions is common among DIY funds. The timing of contributions around June 30 is always critical because a difference of a few days can mean that a contribution intended for 2010-11 can be treated as occurring in 2011-12, with potential consequences for contribution limits and tax deductions.
A week in hand
The best strategy to avoid mistakes with late contributions is to give yourself a good week before the end of June. The best evidence of a successful contribution is having a date before June 30 shown on a bank statement.
When checking you haven’t exceeded your contribution limits it is important to make sure you have included anything that might be treated as a contribution. For example, if your business paid some of your fund expenses and this wasn’t reimbursed, it will be treated as a contribution. The same goes for insurance premiums paid by your business where the policy is owned by the super fund.
Age milestones are relevant when it comes to taking pension benefits, like age 55, when you can start a taxable transition to retirement pension, and 60, when such a pension becomes income tax free.
One of the great benefits of starting superannuation pensions, says Fankhauser, is the tax exemption provided to some or all of the fund’s investment income as a result.
This exemption is only allowable in cases where the minimum required pension has actually been paid. Therefore in order to be entitled to claim the exemption it is vital to check before June 30 that the minimum has been paid.
A good administration system can make life so much easier for a DIY fund, says Tina Wilson, a technical expert with Dixon Advisory & Superannuation Services. A fund that is up to date with its investment information, tax obligations and member records should be able to do such important tasks as prepare and lodge quarterly tax instalment statements, keep on top of contribution limits and calculate minimum pension payment obligations.
Never too late
Getting all of these right can address many of the problems that DIY funds encounter.
An important aspect of DIY super, says SuperGuardian’s Olivia Long is that it’s never too late to improve the way you run your fund.
The start of a new year is a great time to review the fund’s investments and assess past and future expected performance.
A routine approach to DIY fund investment management can be very helpful in determining not only how investments are performing, says Ron Lesh, but also whether a fund is holding too much cash and missing investment opportunities.
Whether the fund is getting the best returns for its cash is another possible potential issue. Lesh says these issues only become obvious when trustees learn that they need to routinely check their funds.
To help trustees, Lesh promotes the value of having some form of computerised system which can help with investments and the preparation of reports.
While the majority of funds that use the BGL system are accountants, Lesh says there are about 1200 who use Simple Super to actively run their funds. It helps them monitor their investments, be on top of their fund balances, and know exactly where they stand when they are drawing pensions.
The Simple Super program costs about $650 to buy which includes training support. Keeping the software up to date costs an annual $407.
Lesh says that one trend is a growing number of accountants who are giving their computer capable clients a copy of Simple Super which they use to help run their funds. Clients enter the data and save money by only using their accountant for high end work like finalising the annual return and doing the fund audit.
A job for the professionals
John McIlroy, chief executive of DIY super administrator Multiport, says many funds get around the administration issues by giving the job to a professional administrator. But they still have to make sure the administrator gets all the necessary information to prepare annual returns so some sort of routine can still be very useful. It’s still possible to be late if you don’t pay attention to the detail, he says.
For funds wishing to manage their investments more efficiently, one issue often overlooked is running their fund according to an investment strategy. This is expected by the regulator but many funds have either no strategy or are running their fund with a strategy totally different to their portfolio.
Making sure you have an up-to-date strategy that reflects the fund’s investments should be an annual task that trustees perform.