Test these 4 factors to see if now is the right time for you.
By Penny Pryor
Strategy Steps founder Louise Biti started up her personal self-managed superannuation fund (SMSF) two years ago because she wanted more control over her retirement. Strategy Steps provides financial planning companies with technical and strategy support, so learning more about the day-to-day practicalities of running an SMSF was important as well.
“The ability to minimise fees due to my knowledge and skills was also a major consideration,” says Biti.
For her, all those things made the timing right.
For most people, it will be a combination of factors that make it a good time to establish an SMSF.
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 most of the legwork yourself.
The Rice Warner survey found that if you require professionals to do most of the other tasks and functions – in other words, if your SMSF is fully serviced – it will only be cheaper than industry and retail super funds when the balance is more than A$500,000. So there is the potential there to reduce costs if you have the time.
Of course, you also need the knowledge to understand what’s involved in running your SMSF, because if you break the law, the buck stops with you.
If you’re 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.
"It really is when you've got the right attitude and time." – Louise Biti, Strategy Steps
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.
Biti says of the best time to start a fund: “It really is when you've got the right attitude and time.”
3) When you want to buy your business 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. I think there are a lot of advantages on a cash-flow basis and also tax advantages,” Biti says.
Start the fund up before you make an offer on the property.
4) Before you retire
“I know there are quite a few advisers suggesting to their older clients they should [start an SMSF before they retire],” Biti says.
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… without actually having to restart your actual pension,” says Biti.
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.
“If you shut one product and start a new product come 1 January, you’ll be subject to deeming,” Biti explains.
Regardless of these changes, if you are thinking of starting an SMSF, it is probably better to start it before retirement, if possible.
“Your 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,” says Biti.