28
May
2013

Is a self managed super fund appropriate for you?

Things to consider...

In recent times Self-managed super funds have become very popular, and for many investors represent an excellent vehicle to manage their retirement assets.

It is my belief that for many Australian’s, who have an SMSF, it is not the appropriate structure. Truth be known, often the person recommending the fund benefits greatly; as a financial planner, a SMSF client is gold, they are generally high revenue clients,  the same applies for accountants and those involved with property investment. We are all incentivised to recommend a SMSF. Is this best for the client, often the answer is yes, it is a great option, however in a lot of other situations, I’m less confident that an SMSF is appropriate.

It is for this reason I will be posting a number of Blog articles discussing SMSF’s to give people a better understanding of what is involved in being the trustee of your own Super Fund.

This first article will focus on the things to consider before setting up a Self-Managed fund.

If you are considering setting up a SMSF the first thing you should do is read the ATO guide “Setting up a self-managed super Fund” here is the link

http://www.ato.gov.au/content/downloads/spr00182478n71923.pdf

The ATO lists 4 primary considerations.

  1. Consider whether you have the time, knowledge and skill to manage your own super fund, as well as the assets and money to make the fund viable.
  2. Compare the costs and benefits of running an SMSF with other retirement saving options.
  3. Make sure you are setting up the fund solely to pay retirement benefits to members or members’ dependants in the event of the member’s death.
  4. Check you understand what is involved in managing your own fund and what it means to be a trustee.

SO what does that mean?

The first consideration is really 2 considerations. Firstly do you have the time knowledge and skill to manage the fund. It is envisaged that you would receive professional advice from an accountant or financial advisor or both, however you the trustee is ultimately responsible for the advice. The responsibility cannot be transferred simply by seeking advice. In fact in the ATO publication around SMSF’s itself distances itself from the advice provided, essentially saying, even if you follow the advice in the publication, if you break the rules bad luck!

So as a trustee it is ultimately up to you to ensure you are following all the legislation correctly. This requires a degree of financial acumen and time to stay abreast.

The second part is to have the assets and money to make it viable, thi is also linked to the second consideration.

How much is enough?

This is debatable, my licensee says a minimum of $200,000, this seems reasonable. I have heard colleagues make valid arguments for a SMSF with assets of $125,000.

If the fund is only going to invest in “traditional” super investments such as managed funds, direct shares, cash, term deposits and alike, the cost comparison is easy. With the cost effectiveness of platforms and wholesale funds these days, the breakeven point for making a SMSF viable is quite high. The exact point is dependent on exact underlying investments and the exact cost of the SMSF. A financial planner can easily calculate the figure for you.

The last client I dealt with wanted a combination of direct shares and some managed funds, the breakeven point was just over $500,000.

If you would like to invest in assets unavailable in a Superannuation platform, the most common being real property, but other investments fit this bill, (collectibles, shares in companies not listed on the stock exchange plus more) then comparative cost is not the issue, it is necessary to determine whether there is enough funds in the fund or being contributed to fund to either purchase the desired assets and the ongoing costs associated with the assets (including borrowing costs) as well as costs associated with fund.

 if you have the funds to meet these commitments, it is than necessary to assess are these investments (after costs) going to achieve your retirement goals and are they going to be more effective than traditional investments. In a lot of cases the answer is undoubtedly yes. But the analysis needs to be considered. If you simply do not want to invest in shares because you don’t trust them, but want some growth assets in your retirement savings, then investing in a SMSF and purchasing a real property might be a good option.

The third consideration is more a legislative issue, essentially the assets in the SMSF must be only for providing for your retirement, it prevents you from buying a house to live in for you or a family member with super funds and similar type strategies.

The 4th consideration is being aware of your role as a trustee, many people go into a SMSF not realising what being a trustee involves.

The ATO guide outlines these roles as follows

When you set up an SMSF, you take on the role of either a:

  1. trustee
  2. director of a company that is a trustee (called a ‘corporate trustee’).

A trustee is a person or company that holds and invests the fund’s assets for the benefit of members.  As a trustee or director of a corporate trustee, you will be responsible for running the fund and making decisions that affect the retirement interests of each fund member, including yourself.

You must comply with the super and tax laws to make sure your fund is entitled to tax concessions and your members’ interests are protected.

You must also:

 

  1. act in the best interests of all fund members when you make decisions
  2. manage the fund separately from your own affairs
  3. make sure the money in the fund is only accessed if the law allows it

 

Once you have reviewed these considerations, and believe a SMSF is appropriate, the next step is the set up. I will outline the steps required to set up a SMSF in my next blog.

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Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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