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When self managed super turns sour

Since the GCC many Australians have become disillusioned with superannuation and the promise that it would allow us to retire without having to rely on government pensions to put food on the table.

Many mums and dads lost a significant portion of their retirement nest egg as the value of their super sank.

One of the positives that came out of this tragic situation was a greater awareness of how important it is to be pro-active with your superannuation, which up until recent times, many Australians were not.

However recently there has been a marked increase in the number of people establishing their own self managed super funds, enticed by their flexibility and the feeling of control individuals have over where their retirement nest egg is being invested.

But is there a danger of overselling self managed super?

In a recent Sydney Morning Herald article, financial adviser Crystal Broadfoot spoke of being dismayed at the number of people she sees who have been poorly advised to set up a self-managed super fund (SMSF), particularly funds that rely heavily on property as an investment asset.

”We do see the need for [DIY funds] in certain and limited situations, and that’s generally with your high net-wealth, high super-balance clients,” says Broadfoot, of the Melbourne-based firm Clements Dunne & Bell, a member of the Count Financial group.

”But we are dismayed at the amount of clients who come to us who have been, what we feel, incorrectly set up with a SMSF.”

Safe as houses – super!

With the recent introduction of a new ruling that allows people to borrow within their fund to invest in property, Broadfoot says spruikers have come out of the woodwork, enticing unsuspecting, “green” wannabe investors into the property game.

Often they have very low existing super balances or lack the necessary understanding to adequately manage and oversee their super fund’s property investment activities, leading them to rely entirely on platform-administration services.

Hence, they end up paying exorbitant administration costs and, far from having a self managed fund, end up in the same situation as before with external administrators controlling their assets and future wealth prospects.

What if those administrators know very little about creating wealth with property?

Opportunity knocks – but for whom?

The danger for those considering self managed super is obviously getting drawn in by sophisticated spruikers who promise to take your $50,000 investment and make you millions by retirement.

Wealth management partner at HLB Mann Judd Sydney, Jonathan Philpot, is concerned about just that and says, ”Many property spruikers are encouraging people with super balances of $50,000 – and even less – to purchase a residential property in their SMSF, with the property being geared to about 70 per cent.”

Philpot says this is simply not sufficient to dive headlong into self-managed super and suggests the minimum people need in the kitty to start out is $300,000.

He says negatively gearing property in a SMSF has numerous problems, including the fact that it simply doesn’t make sense in the low tax environment of superannuation because the tax benefits are minimal.

Then there’s the issue of diversification. Philpot says relying solely on negatively geared real estate means shelling out expenses from your fund to hold it like loan repayments, especially if it sits vacant for any period of time.

What income do you use to hold the property if all you have is the property in your fund?

Making your money in retirement

While setting up a SMSF isn’t for everyone, for those with significant funds, say over $100,000 a self-managed super can be the veritable pot of gold at the end of the working rainbow.

I’m seeing more and more Baby Boomers setting up an SMSF and buying a property or two in their fund and over the last few years they’ve clearly outperformed managed funds and the share market.

Maybe it’s something you should think about and checking out with your accountant.

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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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