Bruce Brammall, The West Australian, 4 March, 2019
Something about bad things happening in threes? Well, that’s how many DIY super fund car wrecks I saw last week.
Each was opened for very different reasons and, of course, with the best of intentions – to get on the self-managed superannuation fund super-highway.
Sadly, each had now limped to the off-ramp, hazard lights on, with drivers reaching for old maps – out of range of Google Maps – trying to remember where the hell it was they thought they were originally heading.
This is, unfortunately, the plight of many SMSF trustees. The shiny new car seemed so sexy. It seemed like such a good idea at the time, but then reality sets in. And, often, so had paralysis.
Car Wreck #1
A lawyer, frustrated with low returns from their industry fund, decided to set up a SMSF.
He had poured about $30,000 of cash into it, but had done nothing else. He had two other regular super funds (with bits and pieces of insurance that, thankfully, had not been cancelled).
The $30,000 sitting in the SMSF’s super account was earning about 2 per cent interest a year, or $600. The accounting and audit fees on the fund, are about $2500. That’s going backwards at $1900, or 6.3 per cent, a year, and the negative return would increase at a rapid rate.
If he was upset with his industry fund return, how pissed off should he be with his new guaranteed loss each year?
Car Wreck #2
Two sisters. One wanted to start a SMSF after being torn a new one during a marriage breakdown. The other agreed, a little excitedly.
The sisters saw a “financial adviser/accountant”, tipped their super fund monies into the SMSF new bank account, then asked their adviser for some investment advice. The adviser shrugged her shoulders, saying she couldn’t help.
They decided to bumble on. After a year, they realised they were out of their depth. They had made a few, small, investments, but were now bunnies in the headlights. And, thankfully, sought help.
Car Wreck #3
A young couple were keen to invest in property and went to a “free” (*) seminar, run by a developer, about two years ago. (* “Free”, in this case, being the most financially disastrous thing they’d ever done.)
Within weeks, they had been suckered in with “statements of advice” showing likely extraordinary returns. They immediately signed up to buy a development property in their personal names, but also agreed to set up a SMSF and purchase a second property.
Development properties take some time to build. Which was due about now. Unfortunately, with a slump in the property market, the banks’ valuations were coming up short, meaning they had to tip more money in.
It’s ugly, and stressful, already. But it’s going to get a whole lot uglier and more stressful in the coming months. Good chance they will lose most of the money they had transferred from other super funds into their SMSF.
And they’ll have to start their retirement savings all over again.
Lessons from the carnage
Don’t set up a SMSF on a whim, because of disappointment with an industry fund return. Don’t let an accountant, masquerading as a financial adviser, talk you into starting a SMSF. And never, ever, ever, start a SMSF because a property developer suggested so. Ever. Just never. Seriously.
SMSFs are potentially seriously powerful beasts. In the proper hands, absolutely, they can produce superior returns, that can potentially thrash returns by funds regulated by the Australian Prudential Regulation Authority (“APRA funds”, ie, all funds that aren’t SMSFs).
And, if you have found yourself with a SMSF that you really don’t know how to drive, find yourself an impartial financial adviser who can help you make a really critical choice.
Those choices are to either make that SMSF work, properly, or … cut your damn losses, shut the damn thing down, and get your money back into an APRA-regulated fund.
If you’re thinking about setting one up, and you’re just not sure … again, see an impartial financial adviser. Pay them for a couple of hours of their time.
If it’s not right, don’t do it. For God’s sake, don’t get in the car. Put it on the backburner and think about it again in a few years.
You are, unequivocally, better off in a bad APRA-fund than a SMSF you have no clue how to operate.