There are a lot of benefits in taking control of your super and deciding to set up an self-managed super fund (SMSF); however like most things, doing a bit of research and planning up front can alleviate the stress and ensure that you get the outcome you want.
From my 15 years in dealing with SMSFs I have seen the good, the bad and the downright ugly in relation to setting up an SMSF! Here I outline 5 mistakes I commonly see. Some points may seem obvious to you, but time and time again it seems people are attracted to the lowest price and rush in. As they say, ‘quality and value are remembered long after the price is forgotten’.
1. Getting the right advisers on-board
Ok, I am not trying self-promote here, but I truly believe ‘DIY super funds’ are a bit of a myth. If you want to maximize your retirement savings you are going to need assistance from a range of professionals starting with a financial adviser who specialises in SMSFs. A good financial adviser will not only be able to assist you in formulating the right investment strategy but also assist you in navigating the myriad of super and tax laws to keep you on the straight and narrow and achieve your retirement objectives. SMSFs are a fantastic super vehicle but they are not suitable for everybody.
You will also need the services of an accountant/administrator to prepare the annual financial reports and tax return and an auditor. Depending on your SMSF investment strategy, you may also need from time to time the services from a share broker, real estate agent, banker, finance broker, lawyer, etc.
Do your research, ask for referrals, but please be wary of the fine print of those SMSF providers offering ‘free set up’ and/or quote to do it all for under $1,000 per year. You will find that you are forced to use their preferred banks, fund managers and investment advisers which all pay a commission to the SMSF provider and many of their add-on features are charged at a premium rate. Remember some of the main benefits of SMSFs are control and choice, and your ability to freely access the best in the business wherever they may be.
2. Choosing the wrong type of trustee
When establishing your SMSF you need to consider whether you will be individual trustees, or directors of a corporate trustee. This is very important as you will be responsible managing your SMSFs affairs.
There are pros and cons of using either trustee option (please see my article about SMSF trustees on the website), but there are only a few examples where individual trustees would be the better option
Two main reasons to consider appointing a corporate trustees are; reduces your personal risk to litigation and loss of assets (note I said reduces and not eliminates) and the new SMSF penalty regime administered by the ATO unfairly penalises individual trustees over a corporate trustee.
Which brings me to my next point and links in with point 1 – ‘free SMSF establishment’ offers will almost always involve setting up the SMSF using individual trustees instead of a corporate trustee to save the SMSF provider money, and this can cost you a lot more in the long run. Read the fine print to make sure you know what you are getting as ASIC is taking another one of SMSF providers to court this week over misleading advertisements and hidden charges and costs.
3. Allowing time for rollovers
Some clients put the ‘cart before the horse’ and are already making plans for the SMSF’s first investment before it even has the cash to invest. This is particularly true with property investments where I see contracts being entered into with tight settlement deadlines (and in the case of borrowing arrangements, even before finance has been approved!). Remember your SMSF has just been established and it will take time for the ATO and other Regulatory Bodies to confirm its official registration and update their databases.
Retail and industry super funds are not allowed to release (rollover) your super to your SMSF until they can verify the SMSF’s registration. In my experience it can take a couple of weeks between sending the rollover request to the other super fund and receiving the benefits in your SMSF’s bank account. Most retail and industry funds will want certified copies of your driver’s licence and some form of trustee declaration confirming your SMSF is complying and can receive rollovers.
4. Ensuring insurance cover continues
Connected to the above point is insurance. Typically your super in a retail or industry super fund will have insurance cover for things like death and disability and maybe income protection as well. When you roll over your super between super funds, the insurance cover ceases therefore it is vital that you understand what insurances you have and will need.
This is where SMSF Specialist Adviser can assist you in maintaining your insurance cover. They can even review it to ensure you have the right cover in the right places. If you are in any doubt, you can always leave $1,000- $2,000 in the old super fund to keep the insurance cover alive before taking out a new insurance policy in your SMSF – but whatever you do, don’t let insurance lapse without seeking advice as you are not only jeopardising you financial position, but also that of your loved ones.
5. Not knowing the rules
OK, I am not expecting SMSF trustees to be able to recite chapter and verse of the various super and tax laws (that’s my job!), but remember as trustee, you are responsible for your SMSF complying with the law even if you use professionals to manage your SMSF. So take an interest in your super and get to know the basic investment, contribution and withdrawal requirements and build on them from there. Again, this is where a SMSF Specialist Adviser is invaluable in assisting you to not only comply with the law, but also maximise the opportunities the law presents – if in doubt seek their advice first!
Well I hope you found this article useful as a guide if you are thinking about setting up your own SMSF. If you would like to know more please contact Jason McLaren on 0418 800 363. You can keep up to-date on all things SMSF by following us on Facebook.
The information contained in this article is general in nature and does not take into account your personal situation or objectives. You should not act on this information in any way before seeking professional advice from a licensed financial adviser.
