Self Managed Super – Avoiding the Pitfalls

A number of our clients either have or are contemplating a Self Managed Super Fund (SMSF).  We thought it would be valuable to talk to Brett Martin from Bridges Financial Services about the opportunities and pitfalls this type of fund presents.

Mel:  When is an appropriate time to set up a SMSF?

Brett:  To make it cost effective, you should have an appropriate level of funds.  The generally accepted number is around $300,000.  Having said that, it depends on your circumstances.  For example, a small business owner might set up a fund to purchase a commercial property and pay their SMSF the rent rather than lease the premises.

Mel:  So, what are the advantages of a SMSF?

Brett:  Control is the key.  As trustee of your own SMSF you ultimately control where or how the assets are invested.  You also have a greater variety of investment choices and your scope of investment type is wider e.g.  commercial property, residential property, art, stamps, coins…. you name it.  However, there is a definite push from the ATO to discourage the more ‘exotic’ types of investments through more onerous legislation.

Another advantage is that you can now borrow within a SMSF.  Although this can also be a pitfall, if not structured in the right way.

Mel:  Speaking of pitfalls, what are the dangers in moving to a SMSF?

Brett:  If your fund is deemed to be non-compliant by the ATO, the maximum penalty that can be applied is 46.5% of the fund’s assets.  So it is important that trustees are aware of their obligations and the rules they are operating under.

Another pitfall is that SMSFs are regulated by the ATO and not the Australian Prudential Regulation Authority (APRA) who regulate mainstream superannuation funds.  Therefore, should a SMSF be the victim of fraud or theft, unlike an APRA regulated super fund which is eligible for compensation, a SMSF is not.

From an advisers perspective what we see is that trustees often think they can do it themselves and ‘beat the market’.  However, unfortunately the reality is often the reverse as many trustees just don’t have the time or inclination to follow investment markets closely.  All too often I will see SMSFs with cash levels that are too high with poor diversification across the different asset classes.

Mel:  That’s a lot of pitfalls.  What’s your advice for someone thinking of setting up a SMSF?

Brett:  My advice would be to get advice.

Mel:  OK then, how do you choose the right financial advisor?

Brett:  Choosing an advisor is like choosing an accountant or a doctor.  You look for someone who is well qualified and has experience.  Not all financial advisors have experience and qualifications in SMSF’s, so you need to choose wisely.

Mel:  What’s the best way to find a good adviser?

Brett:  Word of mouth is one way:  talk to your friends, family or your accountant and ask them what they are doing or who they are using.  In Australia we seem very reluctant to discuss our investment experiences, but we really should do it more.  The better educated we are then the better decisions we’re going to make.

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