Self Managed Super funds (SMSF) are becoming more and more popular these days, but I’m really concerned that people are just running out to get one without properly thinking about WHY they would open one up, and not seeking professional advice. Accountants are a very important aspect of SMSF’s in that they can set one up for you, run the audits and administration behind it, but most are not allowed to provide financial advice on the suitability of the investment.
In recent times a lot of people have had concerns with how their Superannuation is invested – in part, thanks to the GFC. This led to a lot of people thinking they could run their Superannuation funds better than the investment managers of major investment houses such as Colonial First State, AMP, Macquarie etc. etc.
More and more people are also looking at investing their Superannuation into the property market – after all, the great Australian dream is to own a property.
I can completely understand where investors are coming from: The GFC caused so much upheaval in financial markets and the economy in general. I can see how people can be disgruntled with the share market and where their Superannuation was invested, but my greatest concern of all is that people are not seeking professional advice. They are not talking to their financial adviser to understand what is the best approach for them when it comes to their retirement savings.
So in very broad terms, here is what I think is the good, the bad and the ugly when it comes to SMSF’s:
- Flexibility on where you can invest your money. You are able to purchase an investment property via your Superannuation monies, as well as the traditional investments such as shares and managed funds. You can also invest in artwork and collectibles.
- Control: you control where your money is invested and how it is invested
- Cost: this is a double-edged sword. Depending on the balance of your Super fund, this could be a cost effective option for you as most of the costs involved in a SMSF is a flat dollar amount. This means that let’s say the overall costs per annum are $5000 and you have a Super investment of $250,000, the cost as a percentage is 2%
- Flexibility: Is there too much flexibility? I have come across clients who don’t really believe they will be caught and they can purchase that property and live in it themselves, or they can purchase that piece of art and have it put up in their home. You can not use these assets for personal use until you have reached preservation age (typically age 65). Just like you can not draw money from your Super fund now to buy whatever you like!
- Control: Are clients taking too much control and not outsourcing some of this to their Financial Adviser? Does this mean that they are not seeking the advice of a professional and therefore taking into consideration their actual retirement needs?
- Cost: As I mentioned before this really depends on your account balance. Again, let’s say the annual cost of administration, audits and compliance comes to $5000 and your balance is $50,000 this means your cost as a percentage is 10%!! And most people complain about their retail super fund costing between 1.5 – 2.5%
- Flexibility: If you haven’t sought personalised financial advice you may be doing your retirement a disservice. For example, if you place all your retirement savings into a property or piece of artwork you are relying on that one investment to fund your retirement as you are putting all your eggs in one basket. As with any investment, it is so important to diversify your investment across different asset classes and investment types. Also, don’t forget that your current Super fund probably has some Insurance attached. Let’s say you move your Super to a SMSF, apply for Insurance and can not get the cover you require due to your health? By moving your Super without considering Insurance may have serious consequences to your family and beneficiaries.
- Control: it is highly likely that you, as a member of the SMSF, will also be the Trustee of the SMSF. This means that it is up to you to ensure you operate the fund in a compliant manner. Whilst you may engage an accountant to audit and administer the fund, you will need to know the rules behind operating the fund. This is not only very time consuming, but as legislation changes, you need to make sure your fund meets legislative requirements
- Cost: In the event that the ATO finds that your SMSF is not compliant, you may face severe financial penalties. This might be from a fine, to having to unravel your SMSF. Let’s say you just purchase a property and paid stamp duty, legal fees, set up fees and bank fees. If your SMSF is found to be non-complying and you have to sell the property, it means that you have just wasted those fees as well as having to fund agent’s fees to sell the property.
As I mentioned at the start, there are great benefits in starting up a SMSF, but I really think that there are too many people opening them up and not properly understanding the legal requirements behind running a SMSF, nor the detriment the investor may have by not seeking proper investment and insurance advice. So please please please engage a Financial Adviser if you are contemplating changing your Superannuation arrangements.
This information was prepared by Monarch Advisory Group Pty Ltd, ABN 75155549705. Licensed under Securitor Financial Group Ltd, ABN 48 009 189 495 AFSL & Australian Credit Licence (ACL) 240687 (Securitor) and is current as at January 2013.
This publication provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The information in this publication does not take into account your objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it and obtain financial advice. Any taxation position described in this publication is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation.
Your individual situation may differ and you should seek independent professional tax advice. The rules associated with the super and tax regimes are complex and subject to change and the opportunities and effects will differ depending on your personal circumstances.