Bruce Brammall, 17 October, 2018, Eureka Report
SUMMARY: Three reasons that should, and three reasons that should not, be why you might set up a SMSF.
It might seem like a self-managed super fund is the trend. And if everyone else seems to be doing it, surely you can do it to.
Not so fast. While SMSFs sound appealing, they are not some golden honeypot that instantly create bigger retirement riches. They won’t do well without a lot of work. And a lot of that work is pretty mundane.
SMSFs are potentially powerful beasts that can add significant assets to your retirement.
But they are also complex. And wielded by the unsophisticated, can literally be a way of handing your hard-earned retirement savings to someone else for their retirement. (Yes, seriously. In some cases, you’ll simply be handing your retirement savings over to someone else, immediately. more on this later.)
There are good reasons to start a self-managed super fund. And there are some awful reasons. Today, ahead of Investsmart’s Adviser Q&A with myself, Max Newnham and Tony Kaye on Thursday, here are my top three reasons for starting a SMSF … and my top three reasons they aren’t right for you.
Let’s start with the good. Note that one reason is probably insufficient – you should probably tick a number of boxes before opening a SMSF.
Many people take active control over their personal investments and always have. They love the research, the challenge of finding investments that they believe will deliver outperformance, and have often been successful investors in their own rights.
By successful investors, I generally mean they have been able to beat the “market”, which I generally measure as being able to come out on top of the equivalent index fund (such as Vanguard).
You might look at the returns in the major share funds for cash, or fixed interest, or property or shares and think that you can do, and have done, better, yourself.
- Purchasing property (or other specialised assets)
Super funds regulated by the Australian Prudential Regulation Authority will not allow you to purchase direct property investments, either residential or commercial.
And a favourite of Australian business owners has been to purchase the commercial premises out of which their business operates, which a SMSF allows.
A SMSF can purchase those assets. And they can currently do them with gearing – that is, borrowing up to 70% or 80% of the purchase price of those assets.
Direct property – residential or commercial – can be a powerful way of building retirement assets. Australians have loved, for decades, the ability to gear into property. They love negative gearing. They love the tax breaks. And all of these are potentially available inside a SMSF – although the tax breaks are somewhat limited, because the income tax rate in a super fund is 15%.
This positive is, sadly, equally weighted with a negative (see below). This is not for everyone. In fact, it’s for very few. It’s complex and risky and, done badly can lead to you losing hundreds of thousands of dollars.
But by those with experience in property and an ability to read property as an asset class, the potential to use a SMSF to create wealth is potentially tremendous.
There comes a point with the growth in your overall super balance where cost might become an important reason.
Most APRA-regulated super funds charge some sort of a percentage-based fee. The higher the balance, the higher the higher the total fees being charged to your super fund.
Some SMSF costs are fixed dollar costs, so they are relatively smaller for higher balances. These include government fees.
Other fees might reduce, as a percentage, as the value of the fund rises. And others are a fixed percentage, such as fund manager fees.
The oft-quoted industry standard to begin to consider a SMSF is $200,000. This figure might be acceptable if intend to do absolutely everything yourself (except for accounting and audit, which can be around $2000-3000), won’t need advisers and plan to use investments without management expense ratios (such as managed funds and ETFs).
But if you’re going to need assistance with the investments, such as using a financial adviser, then the balance needs to be higher, possibly above $400,000 or $500,000 dollars. That might be a combined balance for you and your partner.
There are many other benefits of SMSFs that can be related to some of these reasons above, including flexibility, better tax management, estate planning options and greater insurance options.
Now, here are the reasons why you shouldn’t set up a SMSF.
- To buy property from a developer
This is the single worst reason. This will almost certainly see you buy an overpriced property and hand a good chunk of your super over to the developer and their hangers on.
Many years ago, developers realised that there was an almost untapped market for them. People, often couples, who couldn’t afford to buy property from them with their personal income, but who had reasonable superannuation balances.
This became easy pickings for developers. After attending their seminars, or first sales meeting, they could recommend associated individuals (financial advisers and law firms) to help set up the SMSF and roll other funds into it.
The property developer is the real winner. See this column for more information (2/12/15).
- You don’t like paying fees
Just to try to avoid fees is not a valid reason to open a SMSF. Some fees are unavoidable, and where they can be avoided, it will often come with a cost to your time (which everyone, including retirees, needs to put a value on).
Some fees are just bloody good value.
Many people don’t like paying fees to fund managers or super platforms. But these fees can often be awesomely cheap, particularly for those with low super balances.
If you’ve got $100,000 in super and you’re paying a total of 1% in fees, would you really take over everything to do with your super for $1000 a year? Certainly, you can’t run a SMSF for that little. From a time perspective, that is a bargain.
But 1% of $1 million is $10,000 for, arguably, no extra work on the part of the provider. And it might make a whole lot more sense to open a SMSF.
Paying fees is a part of life. But some fees, for the service provided, are exceptional value.
- You’re not organised
SMSFs come with paperwork. And depending on the complexity of your investments, potentially plenty of it. If you’re not at least pretty good with paperwork, then let this be a warning flag that a SMSF is probably not for you.
It can’t be avoided (although you can pay others to be on top of this for you). You need to read the paperwork (from ASIC, your accountant, auditor, investments, platforms, insurers, etc) as it comes in, as some might require immediate action.
Opportunities could be missed. Fines could be imposed.
And if you only deal with the urgent paperwork immediately and put the rest to the side to deal with later, you will still need to deal with it, at least every couple of months.
Fourth on the list for me is that you simply want to be a stock picker and you want to pick your investments. There are a number of platforms now where you can have significant control over your investments, but avoid the paperwork, by having the platform look after all that for you.
Risk and reward, we all know, are intertwined. And running a SMSF is a risk.
There can be great rewards for getting it right and getting the blend of investments, tax and cost control in the right balance for you.
But getting it wrong can be a disaster for your future.
It’s not the trendy new thing that everyone should have. Far from it. Most Australians are totally unsuited to become SMSF trustees. But if there are enough good reasons out there, and you can tick enough boxes, then the opportunity could be well worth it.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s sixth book, Mortgages Made Easy, is available now.