By Petrina Frost
There has been a lot of hype in the media recently about self managed super funds (SMSFs) being the big new thing in retirement savings. Lots of financial advisors have latched onto SMSFs as their own personal get rich quick scheme, trapping many people into setting up an SMSF when it’s not really the best strategy for them at the time.
So how do you tell if an SMSF is the right strategy for you? I set up my own super fund with my husband in 2012, hoping to see better returns on my nest egg while cashing out of the increasingly volatile and morally corrupt global shares market. I lost $46,000 from my superannuation fund in the global finance crisis of 2008, and I was furious at the lack of responsibility brokers in foreign investment banks exercised over my hard earned money.
Self managed super funds typically focus on the property market as the key component of a personalised investment strategy – not shares. When a financial advisor showed me how I could quintuple the value of my super by buying one property, I leapt at the chance to escape my under-performing retail super fund, and dragged my husband along with me.
The problem with this was that I had four times as much money in super savings at the time than he did. And I was contributing regularly at the same rate, out stripping him annually by 75 per cent. When our SMSF was set up, all that was evened out, and suddenly his balance was fifty/fifty with mine.
It cost a lot of money to set the SMSF up initially. We were assured this initial outlay was recoverable, when really we were taking money from one hand and putting it in the other. The administrative governance of an SMSF is quite complicated, and it’s easy for some of these fly-by-night financial advisors to convince you they know what they are doing. But if they don’t the ATO can force you to unwind your SMSF and start all over again, which means you could lose thousands of dollars of your precious retirement savings in the process.
Then there are the ongoing fees and taxes that come out of your fund on a regular basis. Because you’re actually writing the cheques yourself, suddenly you realize it costs a lot to run a super fund and you really DO have to pay the TO 15 per cent of everything you deposit. And without thousands of other members to share the costs with you, the fees can hit you where it really hurts.
The big banks backing SMSFs are telling people they need a super balance of at least $200K to get started. Many financial advisors will tell you this isn’t true – don’t listen to them! You absolutely need at least $200K to secure your first investment property and move on to acquiring your second one. Without it, you could be looking at a stagnant super fund balance for the rest of your working life. And worse – when you actually to retire, you may not have enough money to maintain your current lifestyle.
Finally, the big challenge around SMSFs, which every women should be concerned with, is partnering with their husband, spouse or significant other to set up the fund. Because, as we know, the divorce rate isn’t shrinking. While you might think you are going to retire with your beloved, many women are reaching their 50th birthday and finding the person they picked as their life partner just isn’t going to go the distance. In the event of divorce the SMSF has to be closed. Any investments you made – property, art, wine, managed funds or otherwise, may not have matured, and you could stand to lose thousands, again, leaving you with a smaller nest egg that you expected. It’s a harsh reality, but true love does fade – as nearly 50,000 Australians can attest every year.
If I had my time over again, I don’t think I would have moved my super into an SMSF. Now that I’m the trustee of one, I’m determined to give it a red hot go. I continue to crow every time I see a report in the news about the most recent $30 billion being wiped off the shares market because I know my money didn’t just go down the gurgler. But my advice to those who would follow in my footsteps is to do your research, check your facts, and double check the references for any administrator you’d like to hire. It could be the difference between living in a caravan or holidaying in one when you retire.
Petrina Frost is a Business Transformation Leader who has worked for some of Australia’s biggest businesses, including the banking and finance sector. This story does not constitute financial advice – the writer suggests anyone seeking to set up a self managed super should do so with the advice of a registered financial adviser.