When is a Good Time to Start a Self Managed Superannuation Fund (SMSF)?26-Mar-2014
When is it a good time to start a Self Managed Superannuation Fund (SMSF)? This is one of the most common questions we get from clients on SMSF's.
There isn’t any one specific factor, but a combination of circumstances that may help you to decide when to start a SMSF and these include:
1) When you have the money
There is no absolute minimum balance for an SMSF. Speaking at the SMSF Professional Association of Australia (SPAA) conference recently, Australian Securities and Investments Commission (ASIC) commissioner Greg Tanzer stressed that ASIC would not mandate a minimum balance.
“That is not what we are about,” says Tanzer. “We are not about trying to specify that if the person has a minimum balance of less than A$100,000, say, you cannot advise them to go into an SMSF.”
As Tanzer went on to say, balance is just one consideration. But it is a significant one and unless there are extraordinary circumstances, the higher your balance, the more cost-effective it is to run an SMSF.
A 2013 research report by Rice Warner for ASIC on the costs of SMSFs found that those with at least A$200,000 were cheaper than both industry and retail funds, but the trustees needed to undertake some of the administration tasks to keep costs down.
2) When you have the time and knowledge
If you want to keep costs to a minimum, then you need to have the time to do some of the legwork yourself.
If you are new to investing, learning how to do it won’t happen overnight. The biggest risks to not having sufficient knowledge are being seduced by glitzy advertising into unsuitable and poor investment choices – Storm Financial comes to mind – and not understanding your trustee responsibilities.
This is where Simeoni has assisted clients in navigating their way through the SMSF regulation. Even though we are qualified financial planners, we prefer not to give specific advice on investments but rather guide or consult once a client has come across a proposed investment strategy.
If you make a mistake and invest in something you shouldn’t, for example, you risk the fund becoming non-compliant and paying tax at 45 per cent instead of the 15 per cent tax rate on superannuation. That is why having the right advice is crucial.
3) When you want to buy business property or residential property
One of the things you can do with an SMSF is purchase your business real property. If you are about to buy a business premise, this could make it a good time to establish a fund.
Maybe you're running your own business and you want to buy the premises to operate the business in. There might be a lot of advantages on a cash-flow basis and also tax advantages in this investment strategy.
A number of clients are not comfortable with shares or other financial investments and are more confident in buying residential property (but not one you already own). The key aspect is what is the client comfortable in investing and whether it suits their investment strategy. Start the fund up before you make an offer on the property.
4) Before you retire
There are quite a few experts suggesting to their older clients they should start an SMSF before they retire.
The increased flexibility of an SMSF means if you start a pension within your fund you can change the underlying investments that support that pension without having to commute it and restart another, which is what you may need to do if you had an account-based pension through a commercial provider.
It gives you that ability to switch your investments strategy without actually having to restart your actual pension.
This is particularly pertinent given slated changes to social security, which will mean asset-tested income streams, like account-based pensions and annuities, will be deemed to be earning a certain rate of income as prescribed by the government. These rates will be included in the Age Pension income test.
Regardless of these changes, if you are thinking of starting an SMSF, it is probably better to start it before retirement, if possible.
Generally, retirement is a very long time and we don't know what’s going to change in legislation and what grandfathering might be in place.
If you have any questions and if a SMSF would suit your long term needs, then, call our office and talk to Paul Simeoni on 0293700400 or email at email@example.com and receive specific advice for your personal requirements.
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