Self Managed Superannuation

Having cunningly devised what I believed to be a great investment strategy, I needed some capital to put it to the test.  Fortunately, in Australia, there is this thing called superannuation, which is basically legally enforced retirement savings.

Like most youngish people, I had paid little to no attention to super, despite the fact that it is my money.  The commercial super companies love people like me.  I had changed jobs several times, had multiple super funds with multiple fund managers, and they creamed all the fees they could.

I was also quite bearish about 2010, and so was uncomfortable letting someone else manage my money.

So, I started looking into setting up my own self managed super fund (SMSF), which turned out relatively straight forward.

The first step was consolidating all my super funds with a single fund manager, and changing the fund profile to "Cash".  Hopefully, this would protect me in the event of another stock market crash whilst I was setting up the SMSF.

Setting up the SMSF was simple enough, but the duration that it took surprised me.  End to end it took about 3 months. 

There are a number of decent web sites how to set up your own SMSF.  But I didn't use any of them.  I simply went to my accountant and said "I want to run my own SMSF".  He could see the determination in my eye, and so didn't question my rationale.

The first delay was caused by the fact that I had asked him about this in May, which was towards the end of the financial year, and he suggested that waiting until the next financial year - which started in July.  This made sense, as there was no point paying full accounting fees for only a 1-2 month period. 

The initial step was to create the Deed document, along with a whole bunch of other documents, including product disclosure statements, meeting minutes, etc.  There was no effort in this, as it was all done in a single meeting with our accountant, which as it turns out, was rather comical, as it included appointing trustees (me and my partner), signing applications for membership (me and my partner),  accepting membership applications (for me and my partner), etc.

To my horror, one of the template documents that my accountant had prepared for me was the Investment Strategy.  Having spent the last 12 months devising what I thought was the ultimate investment strategy, I was somewhat insulted that I was being asked to sign a template document.  My accountant explained that while legally compliant, it was fairly loose in it's asset allocation "recommendations", and would suffice regardless of what my actual strategy was.  I explained that I would get back to him with a merged document.

Once the fund deed was created I could register for an Australian Business Number (ABN) and a Tax File Number (TFN).  I did this online without too much trouble, although it took about 1-2 weeks for the numbers and documentation to come back.

Once I had these, I had all the necessary documentation to be able to apply for bank accounts in the name of the fund.  Rightly or wrongly, the first bank account I created was a Comsec account.  I wanted to create high interest online savings accounts, but each of these (UBank & RaboDirect) needed to be linked to an existing account.

Creating the initial account required me to go to the post office (or chemist) and have them witness the original deed document, and sign that the photocopy that I was about to send away was legit.  I could then snail mail the application form.  Once I had the Comsec account setup I could repeat the process for the online accounts.

Once I had the SMSF bank accounts setup, I could fill out the forms to transfer money from my existing Super Account, into the new bank accounts.  Again, the paperwork was a little painful, as they need to be convinced that you're actually a ligitimate super fund.  The guys at the post office now knew my by name.

The next thing I knew, the existing funds had sent me a cheque, so I forwarded that on to Comsec, had hey presto, a few days later, the money appeared in my account.  I could then commence the "Cash Management" phase of my strategy, and allocate to other accounts and term deposits as required.

Along the 3 month SMSF journey, I went to an ASX investor hour on SMSFs, which was reasonably interesting.  The first hour was all about SMSFs, and the second hour was a sales pitch by an investment mob.  In future, I'll only go to the first hour of those seminars.

I took a few useful tidbits out of the seminar.  These were:

1. There are about 90 responsibilities associated with being an SMSF trustee, however most of these are designed to prevent people getting early access to their funds for dodgy reasons.  As I was planning to invest my money sensibly and use it when I retire, most of these were not significant to me.

2. The only thing that your Super Fund is allowed to own that you are allowed to live in is a commercially viable farm.

3. The average commercial Super Fund is worth around $70,000, and the average SMSF is worth around $900,000.  This is presumably more because of the historical high cost of entry, which previously restricted SMSFs to high net worth individuals, as opposed to the performance of SMSF funds in comparison to commercially run super funds.

On point 3 above, our accountant advised that the minimum amount of funds required to make a SMSF viable was around $300,000, as the accounting costs per year would be around $3,000, which equates to 1% of the fund.  Any less and the management expense becomes burdensome.

If, however, any of the bearish scenarios play out of the next few years, commercially run super funds will struggle to get a positive return.  In this event, having $100,000 in a bank account earning 5% will still grow your fund at 2% per year, after the $3,000 costs.  So, in my humble opinion, if I only had $100,000 (and a solid investment strategy) I would be better off with a SMSF.

Anyway, the SMSF has been up and running now for a few months.  Has it been worth while?  Yes, definitely, if only for peace of mind.

Will it be financially beneficial?  I did it because I believe that I can outperform the market and outperform my previous commercial fund manager.

Delusional?  Perhaps.  Time will tell..

Disclaimer:  I am not a financial adviser.