|The Choice is Yours. What a Super Idea?|
The introduction of choice of superannuation fund legislation, from July 1st 2005, has been widely publicised and is likely to provide a shot in the arm to the DIY superannuation market.
The superannuation landscape is being redrawn by Mum and Dad investors.
In an industry that talks in billions of dollars, the fastest growing segment of the industry is the self-managed super fund, typically with a husband and wife as the only two members. This is a phenomena that continues to confound the critics because the growth shows no signs of slowing and the latest quarterly statistics released by regulator Australian Prudential Regulatory Authority (APRA) show that $135 billion is now held in small or DIY funds which makes it the second largest segment of the super industry, trailing only retail super funds.
With around 2200 new funds being set up each month, the question is what makes these funds so attractive that individuals sign up to take on the onerous responsibilities of being a super fund trustee?
Being in control of their super investments is clearly a big driver for a lot of people - particularly small business owners. It is unlikely that this surge in people setting up their own small super fund is going to slow any time soon.
In fact, small super funds are tipped to enjoy a considerable boost in popularity in the run up to the introduction of fund choice on 1st July next year. Some DIY fund administrators are seeing people setting up funds now in anticipation of the new fund choice regime next year.
Super fund choice may give individuals the ability for the first time to direct where their mandatory 9 per cent super contributions are paid. No one is expecting a flood of people to suddenly change super funds from 1st July next year. Most people are likely to stay put in their existing company or industry fund because doing nothing is the easy option - particularly if you are not confident about selecting a new super fund.
But the thing is, the choice of superannuation legislation only covers federal awards and not state awards. It also does not extend to workplace or enterprise bargaining agreements. Some institutional experts say, super fund choice will only affect 35-40% of the working population.
However, the one market segment that is likely to be the exception to that rule is middle and senior company managers. These are people typically with significant amounts of money in super already and for executives in larger companies, fund choice will allow them for the first time to get their 9 percent super guarantee contributions paid into their own fund. Some will already have their own DIY fund, others will get advice from their accountant or financial planner and set one up. Will this be the correct choice?
The fund choice regime will allow them to consolidate investments under one tax-efficient vehicle with the ability to directly control or influence the investment decisions and potentially save administration fees.
According to the APRA statistics, the average fund balance is climbing - it is now $456,000 - while the number of members has also climbed to 543,000.
So while large numbers of people may be unlikely to exercise their right to change super funds on 1 July next year, the amount of money on the move and heading into DIY super funds may be considerable.
The decision to set up a DIY fund should not be taken lightly. There are advantages in terms of investment control, flexibility, social security and estate planning and taxation benefits. However, there are disadvantages in terms of cost and responsibilities.
DIY super funds can be powerful vehicles for wealth creation. Choosing to set up your own super fund is one super choice you have to get right. Taking independent professional advice is a must.
Tony Martin & Geoff O'Neil - Directors