SMSFs are one of the success stories of our superannuation system, with about 600,000 funds in operation being set up at the rate of over 30,000 a year. Over 1.1 million Australians are trustees of their SMSF, making the structure a focal point of many retirement plans.
But they are not suitable for everyone, and here are some of the key issues to determine whether an SMSF is suitable to meet your objectives and circumstances. They have been developed to address concerns about people being pushed or rushed into an SMSF, and to protect access to the SMSF option for the long term.
1. What do you or your family want to achieve by establishing an SMSF? This explores your reasons for investigating this strategy and whether it aligns with your short-, medium- and long-term goals. There may be better alternatives that may meet your true objectives.
2. Is running a strategy via an SMSF suitable for you in terms of your experience, knowledge and available time? There are many busy executives, truck drivers and small business owners that I have talked out of running an SMSF when they can’t even find one hour in their week to schedule a meeting or engage via Skype to understand their trustee obligations, yet they think they could run an $800,000 investment portfolio.
3. What funds do you have to rollover from an existing fund and are you able to move those funds? Some people are in government, military or state funds that cannot be accessed before a certain age, or maybe a Defined Benefit Scheme that’s too sweet to leave. Can future Super Guarantee contributions be redirected to an SMSF as some employers have a mandated fund under enterprise bargaining agreements? Are there high exit fees or underlying investments that are not liquid?
4. Have insurance needs been adequately identified and addressed for your future protection? Consider the current insurances and do a needs analysis to see if they should be maintained, altered, replaced or cancelled.
5. Are you clear about trustee responsibilities? You may need to commit to more education before setting up the SMSF. Urgency to set up a fund does not remove your duties.
6. Do you appreciate the costs of setting up and the ongoing expenses of administering an SMSF as well as costs related to specific strategies you want to undertake. This includes fees associated with advice, investments, establishment, legal and administration?
7. Have you done a complete cost versus benefit analysis of an SMSF? Are you fully informed or more influenced by a friend or adviser who may have other motivations than your best interests?
8. Have you developed an SMSF investment strategy that is compliant and will help to achieve your objectives? Your expectations need to be grounded in reality, not some magic long-term excess returns based on a few myths.
9. Will the SMSF engage in borrowing or gearing, and what is a reasonable level of gearing in your circumstances based on your retirement plans and analyse the affordability of the gearing strategy?
10. How will the SMSF be administered and which professional services will you need, including financial advice, investments and legal? Have you chosen software that will minimise the administration and reduce costs, and make the work involved easier, especially for monitoring performance and preparing reports at tax time?
They’re not for everyone
Don’t underestimate the time and knowledge required. I hesitate to mention one client who said he could do his research on his mobile phone while driving to work. Or the couple who felt they were ‘property experts’ because they had four Queensland regional properties, having never visited any of them or done more than a cursory Google search. They were headed for a low income, negative capital growth portfolio. On asking for property inspection reports, we found they were also up for tens of thousands of dollars in repairs and maintenance over the coming years. It was agreed that their super was safer in their well-diversified existing strategy than another ‘punt’ on property in an SMSF until they learned more about property investing.
There is more to setting up and managing an SMSF than many people realise, and the process requires the right strategy at the right time to secure future financial security.
Liam Shorte is a specialist SMSF adviser and Director of Verante Financial Planning. This article contains general information only and does not address the circumstances of any individual. This article draws on a circular issued by The Financial Ombudsman Service.