Reacting to the competition from DIY super funds, an increasing number of industry super funds are offering their members the option to invest in ASX300 listed shares, selected Exchange Traded Funds (ETFs) and term deposits. This is a long overdue improvement in the range of investment choices for individuals interested in making their own decisions about where their retirement savings are invested.
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Individual superannuation fund members will still be able DIY to leave all the investment decisions to their fund trustees. But those who are interested in the share market or want to access higher interest returns from term deposits could well benefit from the extended range of investment options.
The direct investment options will not be as extensive as those open to DIY fund investors for several reasons. First, the available investments are confined to those on the fund's approved products list. Second, there's a limit on the amount or percentage of the portfolio allocated to any one investment. Third, key ways of increasing investment yields such as high hybrid securities are not included in the listed shares included in the ASX300 index.
Despite such limitations, the ability to choose individual shares does offer advantages in several situations. For example, DIY fund investors have always had the option to transfer shares in personal names to their super fund. While this triggers any personal accrued capital gains tax liability, it reduces the personal income tax liability on the dividends received in the super fund.
Such transfers can also free money to reduce an outstanding mortgage or personal debts while still retaining a beneficial interest in owning the shares. In the super fund, the investor can also concentrate on continued ownership of quality dividend paying shares.
Being able to purchase ASX300 listed shares in the super fund also allows the member to own diversified quality listed investment companies (LICs). LICs, with some exceptions, provide higher fully franked incomes and lower Management Expense Ratios (MERs) than ETFs and unitised investment options in public offer funds,
Another advantage of the leading LICs is that they are long term investors who do not regularly trade their portfolios. As a result, they have minimised their capital gains tax bills helping them to consistently matched or outperform both index and managed superannuation portfolios.
Having access to term deposits for cash holdings can also help increase interest returns by up to 1 per cent a year especially from smaller institutions forced to pay higher rates to attract deposits. For conservative investors, especially in today's low interest rate regime, this is also a valuable opportunity to improve their super fund's performance when they opt to allocate a considerable part of their portfolio to safer investments.
Daryl Dixon is Dixon Advisory's executive chairman
