SMSF- How do I start?

Some small SMSF catches some don't consider:

1. Industry funds will defer rollovers if its not 100% perfect. Take care. These delays can affect plans
2. Some employers can refuse to contribute to a SMSF
3. Some employees cant rollover super to a SMSF
4. Life insurance
5. Spouse misuse of YOUR super can occur and there is no remedy
6. Loss of prudential protection given only to non-SMSFs
7. Super is real money. Allowing it to waste through bad management is worse than adviser fees.
8. Question if you really can outperform experts employed by industry funds. Some do but not many. Its harder than most think and you wont have access to techniques, tools and products they use to hedge. Most SMSF diversify to a handful of products. Industry funds may have thousands of investments.
9. SMSF property deals usually take a lot longer than the normal settlement and remain unconditional for a lot longer

 

Yep I know a few people in this situation. They just maintain both a retail fund and a SMSF. The employer contributes to the retail fund, and then the employee does a lump sum rollover every year or so from retail fund to SMSF.

 

that's interesting. I though as a employee you've choice to select superannuation guess SMSF is exception. I will check this.

 

Thanks. Reading and understanding it as much as possible is the plan...who do you discuss this before you've put ur team together...Or is it the other way around to put team together first and take my time to understand/read and consult the team before diving in...

 

Setting up an SMSF should be the means to an end that you have defined, rather than the objective itself. In other words it is the way to reach your objective not the actual objective.

$120k is a pretty small balance for an SMSF especially if you are considering a residential IP. Lets say you find an IP at $300k, plan on being able to borrow 70%, so you need 30% or $90k. Add stamp duty, bank fees and legals and you will likely end up with a balance of $10k in your SMSF.

You should start with a Financial Adviser, get them to do a statement of advice for you and see if an SMSF is part of their recommendations. You are likely to need this to be able to borrow money anyway.

Speaking from personal experience, buying property in an SMSF is not a simple process - lets leave it at that!

 

Well said

This would be a troubling position regardless of asset class invested in if you were of an age closeish to retirement. If young with many years ahead of you in the workforce, it can be a cracking start. Many years of being he the workforce for future contributions to acquire other income producing assets.

It is important to understand how financial planners are remunerated. Generally they will be required to "recommend" funds (ie shares) their company offer.

Thus the importance of having a mortgage broker arranging the finance that knows the topic inside out (and a conveyancer that equally is well versed with the topic). With the right people on the team, you don't need to earn the expertise yourself.

 

eg Trade union agreements. Commonwealth and State public service etc. There can be rollover strategies that can still work except if the person is on a defined benefit super plan. These are non transportable

 

Thanks for the comments & I accept your numbers to know 120K is not enough to start buying IP in SMSF. My goal is to build up atleast 150K~170K by end of this year and set up SMSF. We are thinking of buying IP in SMSF but it may not be straight away....may be start with few MF, equities and other stuff to build some balance before buying IP. one thing for sure that at 70% LVR IP will most probably + or neural geared and we can keep sacrificing money to fund any other outflows...
I don't mind sitting with Fin adviser and hear them out...I am bit sceptical of them pushing me their products and before I go and discuss what we are planning to achieve I need to have some understanding of SMSF before they plant their ideas (good/bad) in my mind....

Any recommendation on Fin Advisers from this forum....

 

120k is well under where I'd say you should be looking at a SMSF. The very general advice is that anything under $250k is really not worth it. The costs of compliance alone are going to make generating any real growth difficult with just 120k of capital.

Realistically if all you're able to do is buy shares, MF and cash then why pay all the compliance costs instead of just using an industry or other similar fund?

 

I can't recommend one and I share your skepticism, however I'm concerned you are putting the cart before the horse by deciding on the face of it that you want a SMSF. It is your call, but getting a FP on board will hopefully help you develop a strategic wealth creation plan tailored for your goals and personal circumstances.

I don't think anyone on this forum would recommend an SMSF as a vehicle to build a property portfolio. Doing so might be at odds with the sole purpose test (depending on how you govern your SMSF), but further to this, you can't borrow to improve, you can't release equity from one IP to invest in the next, borrowing is complex .... the list goes on.

 

Hi Wogtalia -
Can I ask you for your reasoning as to why anything under $250k is not really worth it? why are the costs of compliance so limiting?

Cheers Ivan

 

In my experience having acted for a volume of SMSFs and being very familiar with various forms of SMSF strategy, costs and issues I would consider a SMSF with $120K is well outside the parameters for generating decent returns after costs while still retaining all of the benefits such as life cover, diversity and management a public offer fund may provide. That said, I cant put a precise value on the minimum required for a SMSF strategy to be successful. Attempts by ASIC in the past have used a number like $250K but Rice Warners study of approx. 2 years ago can also contradict that view and possibly confirm it !!

I have seen some $1m+ funds perform poorly due to poor trustee decision choices and I have seen low value funds well outperform benchmarks. There can be some strategies that can only be derived through a SMSF and strategies that are longer term too. Considering high admin costs in year one or two may well be justified if the financial decisions consider long term issues.

One of the best start points for a SMSF decision is independent financial advice. My best tip for a budding SMSF is not to seek such advice from anyone who sells/introduces property as there may be too many self interest concerns - especially when their sole or dominant advice is to buy property in a Smsf.

 

This is covered by the 'minimum balance myth'.

No one can agree on what the minimum balance should be and yes there are independent reports and ASIC guidance however no SMSF expert would agree with their findings.

The fact of the matter is that SMSFs are about Choice, Control and Flexibility - and perfect for the self employed (like me!).

I highlight Choice. Sharemarkets are getting smashed and have been for some time. As a result industry funds are not performing and the average mum and dad investor is not getting bang for their buck under compulsory superannuation. Many are seeing at least 9.5% of the their salary going to a fund (usually chosen by the employer) and not seeing positive returns.

As a result, many and especially people 25-45 years of age are looking to self managed superannuation for CHOICE and Control. If they want to invest in cash - let them. A financial advisor does not and should not have to make that choice for them. There are over 1 million members of SMSFs and 500k SMSFs out there, yes - the old SMSF was for the rich - not anymore.

Admin costs have reduced significantly. I will not advertise my costs and highlight my bias in this matter (I run a SMSF business), however, there are options for those that are 25-30 years of age who have built up $100k alone or with a partner (combined super) and they make the choice to set up a SMSF. They don't have to invest in shares or property, maybe they just want bullion or a ETF - maybe they are sick of employer sponsored funds and paying peoples bonuses with no return? We need to give SMSF members some credit, they will know what diversification is and will have a investment strategy that details what their choice is - without it they will not be required. This is stipulated in the ATO booklet they receive upon setting up a fund.

You all know one provider who offers free set up and free first 2 years administration......thats insane, and thats how people can benefit from that choice. They are many like them who are 'execution only' and people have enough info on their site to make the decision.

A financial adviser is not required for ALL 1 million members of SMSFs - however fair a fair share a financial advisor is required - I respect that.

Not all SMSFs have insurance - in fact a small proportion do. Many financial advisors sell property to SMSFs or recommend a share portfolio, some members will want that whereas some won't. Thats their choice.

A perfect example of the minimum balance myth is where a person is self employed. Lets say they have a company and the two members are director. They make a s%^tload of profit and utilise their concessional contribution caps per member (say they are under 50 years of age which is $30k per member) and contribute to the cap into the SMSF. No one can tell them what a balance should be as they have an effective strategy to use contributions to boost their balance - would a financial advisor be the right person to speak to them?

They may have $50k or $100k balance, and bump that balance by $60k a year using contributions from their business. Say they have $100k in super and they're admin fees are $1100, that just over 1% to run the SMSF. Thats their choice, they have control and can make their decision, most likely their accountant will work through this strategy to utilise their contributions effectively as they do the business financials and tax and some have a thorough understanding of the rules/ application of contribution limits. I have written previously on 'structure' however many still use individual trustees - that is their choice, but my firm only caters for 5% of the market as we set up with corporate trustee..

My whole point is that people can make their own choice and don't need people to tell them what to do and mandate their SMSF. Mum and Dad investors have lost faith in financial advisors and industry funds with the various scandals that have occurred and if they want to seek advice - they will. Thats their choice.

I'm interested in wogitalia views to.

Hope that helps.

Cheers Ivan

 

Ivan you raise all good points....I like the self employed issue - Often a sound reason to include a SMSF within the family entity structure. And starting with a low balance makes 100% sense in that case. Its often a compelling reason for a SMSF strategy that takes time to implement for its full potential and why a small initial balance may also grow well in a tax sheltered environment. Other examples where a SMSF can offer unique benefits (incl of the control issues !!) can include:

- Death benefit strategies between generations (great for small business)
- Unit trust strategies especially unrelated parties and even related parties
- Asset protection
- Overseas and other investments not offered by mainstream funds eg your office !!
- Borrowing strategies incl bank and related party
- No mandated cap on individual investments eg you can invest 100% in coal mines / winery/ etc if you wish
- Unlisted investments eg widely held trusts, ungeared trusts, property etc
- Currency investment, coins, gold, art etc (subject to rules)
- Hybrid style protective investments like BBOZ (ETF)
etc

 

Reminds me of the joke....

Q What strategy do you use to accumulate $1m in an industry fund ?
A : You start with $2m and choose the growth option.