10 checkpoints before setting up an SMSF

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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.

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8 Responses to 10 checkpoints before setting up an SMSF

  1. Frank February 8, 2018 at 11:28 AM #

    The strongest reason to have an SMSF is if you enjoy managing your own money. I’ll bet the majority of SMSFs lose money if you costed in all the time people spent fiddling and trading and learning the rules and administering them. Otherwise, they should be enjoying life on other things. Let’s talk about returns AFTER all costs involved in managing them.

  2. Graham Hand February 8, 2018 at 11:31 AM #

    Hi Frank, I agree that some of the reasons for having an SMSF are overstated, especially reducing costs, as there are many institutional funds which cost less than 0.2% to do everything, and it would be difficult for most SMSF trustees to beat this. But where an SMSF has unique advantages is the ability to put almost any asset into super, such as unlisted bonds, unlisted property and alternatives not on platforms.

  3. David Owen February 8, 2018 at 11:40 AM #

    We must also factor in the fact that, as people age, their ability to properly manage and administer a SMSF reduces. This particularly the case if one of the members/trustees falls ill or worse. It horrifies me when I see advisors who recommend to clients who are say 65 or thereabouts to set up a SMSF so that they can “control” their superannuation.

    My wife and I have has our SMSF since 1980. Have we really benefitted from it? I doubt it. At long last, we are now in the process of closing it down and utilising off the shelf Wrap accounts. Lower cost and no compliance issues.

    PS I am a financial planner of some 30 years experience.

  4. Len the aussie February 8, 2018 at 11:48 AM #

    SMSF seems to be the buzz word if you can afford commercial property out of your fund and lease it out as the rents go into the fund and tax free and you spend it if possible,

    watched a buddy trying to keep up with it and I think he is getting too old to enjoy it 🙂

  5. Gen Y February 8, 2018 at 1:39 PM #

    Too many people continue to be pushed into SMSFs unnecessarily by their accountants. I have plenty of friends (mid 30s) who have been told by their accoutant they need to be in a SMSF with their aligned adviser then putting them in a portfolio of shares and managed funds… something they could have got in a Wrap product for 30 basis points.

    Meanwhile ASIC would prefer to investigate the obvious that Insto advisers are aligned to their i. House products…

    • SMSFCoach February 9, 2018 at 11:16 PM #

      I agree GenY, a wrap account is suitable for most who just want to control a portfolio of top 300 shares and Managed funds. There has to be other client led needs or objectives for a fund not just an accountant’s “you’ve got enough to run an SMSF”. I shut down a number of these annually. Most licensed SMSF advisers don’t want to see people in SMSFs that are not suited to running one as that puts the future of the sector at risk.

  6. Steve M February 8, 2018 at 6:08 PM #

    Liam provides some sensible advice about considering whether a SMSF is right for you before starting one. (Thanks – great article!) David Owen raises the point I was going to make about an exit strategy from managing the SMSF. I have to admit that alternative retirement strategies is a huge area of ignorance for me. An area that Cufflinks could explore is – what are the alternatives? David and Gen Y mention wrap strategies, but I have not seen any articles that cover these types of products. I spend a lot of time on my SMSF and I do enjoy managing my own money, but I know the time will come when it is too difficult – then what? How do people find the income stream products that will suit them, if not in a SMSF?

    • SMSFCoach February 9, 2018 at 11:22 PM #

      Steve M, you could look at the retail Super Wrap option from any retail provider and AustralianSuper and other Industry funds offer similar DIY options even in Pension phase. You should also consider the option of switching your SMSF to a Small APRA fund with a professional trustee once you feel it is getting too much. That way you can retain your portfolio, still have some control but have the compliance Managed for you.

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