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Do you need a Self-Managed Superannuation Fund? (SMSF)

Do you need a Self-Managed Superannuation Fund (SMSF) …or do you just WANT one? 
SMSF’s are an absolute boom industry in Australia. There are around 600,000 of them operating and well over a million members involved in them.
 
So, are they a good idea?

Fran looks at the pro’s and con’s to help you make the right decision.

Reasons to have an SMSF

There are four reasons you may find a Self-Managed Superannuation Fund is for you:

1. Control is the big one.

That superannuation fund is OURS and no-one is going to care about it as much as we do. We could do better than the faceless minions toiling away in the cubicles of the business and banking world, right? We’re financially savvy and every investment decision we’ve ever made has been great, right? Well, maybe not but it’s our money and if we’re in control of it we’ll know exactly where it is and what it is doing. We get to choose the assets we buy, not just selecting “balanced” in the offered fund alternatives.
 

2. Reducing fees.

If you’ve got a few dollars in superannuation and the fund managers are pocketing 2% every year to manage it for you, it can look appealing to take over. This would mean replacing management and the ‘variable balance-based fees with ‘set fees’ for only doing the required tax reports and audits. There is a bit of a tipping point where this makes sense. If you’re paying fees above $4000 (2% of $200,000 being $4,000) you might see an advantage in having an SMSF where the annual fees could be well be under $3,000.
 

3. Keeping it in the family.

An SMSF is a good option for family units. They can become like a family business and build towards common goals shared by family members.
 

4. Loans.

You can now use your SMSF for asset loans. This has opened the door for investing in real estate even if your fund doesn’t have enough to pay for the asset in cash. However, it’s important to note there are strict guidelines to follow. 
 

Reasons not to have an SMSF

There are six reasons a Self-Managed Superannuation Fund might not be right for you:

1. Have you got the time?

There is a significant amount of time required for managing the fund and doing administrative tasks. A third of people quizzed about this aspect said it took much more time than anticipated. The time required will depend on how active the management needs to be. You’ll need to watch the investments and discuss strategies with other members. You’ll also need to liaise with accountants, property managers and bankers.
 

2. Performance is key.

To justify the cost, time, and effort required your fund will need to out perform industry standards. The net earnings should be level or above industry offerings to justify the effort. Keep in mind you’ll be competing with trained and experienced investors. It is important for members to discuss whether the effort is worth the reward.
 

3. Keeping it in the family.

We all know family and business can be a difficult mix. Conflicting views on investment strategy, relationship breakdowns, and uneven commitment. For example, if one members feels they contribute more than another, they could feel disadvantaged. These can all have a flow-on effect interfering with the performance of the SMSF. 
 

4. Insurances.

Commercial or industry funds can offer well priced group policies. Unfortunately, in an SMSF you won’t have access to these and would need to organise your own insurance.
 

5. They keep changing The Rules!

Superannuation is a pot of gold that the government is trying to tap into by changing taxation rules. The Government have set new limits on how big a fund can be to remain on lower tax rates. The recent threat of removing refunds for input tax credits would also have an affect on SMSFs. Although, making long term plans when the rule framework is uncertain may not be something you want to do. It means keeping up with changes that may impact your decisions down the track. It’s important to include this in your regular maintenance.

You can read more about the Input Tax Credits threat HERE

6. Liability.

The trustees of the SMSF will be responsible for actions taken by your SMSF. It is important to follow the guidelines you’ve had written into the Trust Deed when the fund is set up. There are strict laws and taxation rules, and ignorance is no defence if they’re broken.
 
 
As you can see, there is a lot to think about if you’re considering a Self-Managed Superannuation Fund. Before steaming ahead, talk about these points with the people you’re going into an SMSF with. It’s important to have good communication and understanding about these topics before proceeding.
 
If you’re re-thinking the idea of an SMSF, there are some alternatives to explore. Consider the “do-it-yourself” style of fund offered by some Superannuation Providers. These allow you to make detailed choices about your investments.

Here’s some excellent general information from ASIC to read through:

What is financial independence and why is it so important?

We bang on about financial independence a lot at Money School. It features heavily in our blogs, and it appears in our education for kids.

But what does it actually mean, and why should you care?

What does financial independence mean?

We define financial independence as being able to support your lifestyle without having to work.

In money terms: you don’t need a wage to meet your costs. You’ve got enough income (rent, dividends, interest etc) coming in from your assets (cash, shares, bonds, property etc) that you can feed, clothe and house yourself in the style to which you have become accustomed.

These are technical definitions and can seem a bit nebulous. Here’s what financial independence really means (in my personal experience): Read more

Can you learn about share trading by playing the ASX Sharemarket Game?

Twice a year, the Australian Stock Exchange (ASX) runs a Sharemarket Game (I’ll call it ‘The Game’ from here on in). There’s a public version for any adult and a school version for students. I’ve played it several times and I’ve sucked at it. The photo at the top of this post is how my portfolio performed the last time I played.

This has been a conundrum for me, given my real life experience with shares has mostly been successful.

I have gone back to my engineering training and done a root cause analysis (RCA) on why I can’t seem to do well at this game. I won’t bore you with the RCA diagram. I’ll skip straight to the bottom line, the root cause of my problem, and it is this:

I am lazy. Read more

Lacey Filipich - Money School Financial Training Courses

Becoming a self-funded retiree: more of Fran’s story

If you’ve read anything about Money School, you’d know we wouldn’t be here without Fran, the mother half of the our mother-daughter team.

Fran’s a bit shy. She’s more than happy to be in the background. Getting in front of a camera was a daunting task for her, but with a little coaxing we got there. It’s a shame she’s shy because Fran’s is the more inspirational story in our opinion. Starting investing at 48 years old and now a self-funded retiree, her life proves it’s never too late to start.

We’ve finally convinced her to tell more of her story. Here it is, in her own words:

Read more

Wading into the ethical banking quagmire

Ethical banking started in response to educated consumers wanting assurance that their money is not being used to cause damage. Like recycling, taking shorter showers and buying your food from the local farmers market, it’s another way you can personally contribute to a sustainable future.

Inevitably, the devil is in the detail:

  • Who decides what’s ethical?
  • How do we ensure those with the ‘ethical’ badge are really doing the right thing?
  • What’s the cost to the consumer?
  • And the bottom line: which institutions could you bank with if you want to bank ethically?

Read more

Can today’s teens break into the property market?

Having bought property in 2001 at 19 years old, I get asked this question at least once a month:

 Could a 19 year old do the same today, in 2016?

My short answer is: yes, they could. I’ll outline how in this post.

The far more important question is: if they could, should they? Well, that’s a slightly longer answer. Read more

Super and your home do not mix

By Lacey Filipich BEng(Hons) MAICD

When I saw Joe Hockey on the news in March suggesting that superannuation (super) may one day be available to help First Home Buyers get into the property market, my jaw dropped. Could it be possible that our country’s most senior financial decision maker has such a limited understanding of the purpose of super? Or was this simply an off-the-cuff comment aimed at taking the population’s temperature on this issue?

Though it would still make me unhappy, as it’s an irresponsible way to poll opinions, I hope it’s the latter. If it’s the former and Hockey’s understanding of super and what constitutes an asset is that dismal, quite frankly we’re up the creek with no paddle. Read more

Tips for first time property buyers

By Lacey Filipich BEng(Hons) MAICD

Having bought a property in my teens, I am asked time and again by students and those early in their career how they can do it too. To those aspiring young property magnates, I say: bravo! Thinking about wealth creation in your teens and twenties is fabulous. It’s bound to put you in better stead than those that only wake up to it later in life. That you’re asking the question makes you one in a hundred.

Congratulations done. Now the hard part… Read more

Selling investment property | %%sitename%%

Should you sell your investment property?

Author’s note: This article on selling investment property is by far our most popular – probably because it’s comprehensive and comes complete with formulae – but at over 5,000 words it’s longer than an average book chapter. So, here’s the summary of what you’ll find in this article so you can decide if it’s what you’re after:

  • Five sensible reasons to sell (to reduce interest on your home; poor performance; better asset available; it was once your home; losing sleep over it).
  • Five reasons that it may be better to hold (it’s a recent purchase; solid performance; high potential for growth; it’s key in your strategy; no mortgage on your home).
  • Full worked calculations based on the scenario of having a home mortgage and an investment property (three worked options: keep both; sell investment and swing profits to home mortgage; sell investment and use profits to buy another property).

At the end of the article, you’ll find instructions for obtaining an Excel spreadsheet that does all the calculations covered in the article and lets you run scenarios for your personal situation.

 

Recently, I was asked on two occasions in a single day for my thoughts on whether or not my friends should sell their respective investment properties. When I mentioned being asked the same question twice that day at dinner in the evening, a third friend said ‘Yeah, I’ve been wanting to ask you the same question about my property.’ I’ve been pondering why so many people were thinking about selling their investment properties around then.

Read more