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 particular factor, but a combination of circumstances that may help you to decide when to start an SMSF and these include:
1) When You Have The Money
There is no absolute minimum balance for an SMSF. None of the people in the know will verbalise a definite minimum balance. However, we suggest considering an SMSF when your balance starts to near the $100,000.
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.
However, something to keep in mind is that the trustees handle a lot of the administration tasks as this does help 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 inadequate investment choices – Storm Financial comes to mind – and not understanding your trustee responsibilities.
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 percent instead of the 15 percent tax rate on superannuation. That is why having the right advice is crucial.
3) When You Want To Buy Commercial 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 acquire a business premises, this could make it a good time to establish a fund. Maybe you’re running your own business, and you want to buy the buildings to operate the company in. There might be a lot of advantages on a cash-flow basis and also tax benefits in this investment strategy.
Some people 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 in and whether it suits their investment strategy. Another point to note is that it is suggested that if you are looking to purchase property ensure your fund is established 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. This is a good long-term investment strategy. It gives you that ability to switch your investment strategy without actually having to restart your actual pension. This is particularly pertinent given all the recent changes to social security.
It could potentially mean asset-tested income streams, like account-based pensions and annuities, will be deemed to be earning a certain rate of revenue as prescribed by the government. These rates will be proposed under 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. 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.