If you’re going to set up a self-managed super fund (SMSF), you should keep it simple. Otherwise, the trustees/members can end up way over their heads because they don’t understand what they are doing and they get it wrong.
So what is the key to keeping it simple?
1. Avoid “gimmicky” investments
It is about understanding the assets you’re investing in and the risks. All investments have risks, but some are just plain dodgy.
Avoid putting retirement savings in gimmicky and speculative “investments”. As well as high risk shares, I’m talking about things like bitcoin. I never quite got how this crypto-currency worked and therefore avoided it.
I read that one speculator claimed to have made $10,000 through “pumping and dumping” this virtual currency but his comment that “it’s immoral to let a sucker keep his money” should have caused everyone’s alarm bells to ring.
Now major bitcoin exchanges have disappeared and it seems that so has the investors’ money.
Choosing the investments that are best for an SMSF is not an easy task. A “one-size-fits-all” approach is not appropriate because each person has a different attitude and family circumstances.
2. Get the cash flow right
The fund trustee should devise a clear investment strategy that includes diversification and takes into account the cash-flow needs of the fund, as well as some capital growth.
Limit assets that adversely impact your cash flow. Additional contributions may be needed if the fund’s assets are too heavily weighted to such assets. Spruikers are currently offering limited recourse borrowing arrangements (LRBA), often for high-rise apartments in resort areas.
However, cash flow can become a problem where there is an LRBA. Interest and capital repayments are only part of it. Sometimes tenants are hard to find and there are long vacancy periods, rates, body corporate fees, unexpected and costly repairs, and other outgoings that still have to be paid.
Take care that all members do not exceed the concessional and non-concessional contribution caps, otherwise they will be hit with the punitive excess contributions tax.
Cash flow is needed to pay the fund’s income tax and adviser, accountant and audit fees, and while these can be paid from member contributions, contributions can only be accepted from members aged 65 or more where they have already been gainfully employed for at least 40 hours in a 30-day period in the financial year.
Cash flow becomes even more critical where pensions are being paid by the fund, because if minimum pensions have not been paid by the end of the financial year, the fund loses it tax exemption on income earned from pension assets.
3. Remember the rules
The sole purpose of superannuation is to provide benefits to members when they retire or reach age 65 or to their beneficiaries if they die before age 65.
It is therefore (except in limited circumstances) illegal to lend money to fund members or their associates, or allow them to use fund assets. So don’t do it.
If in doubt get professional coaching to ensure you stick to the rules and invest prudently, and your fund should grow and provide you with a healthy income in retirement.
The preparation of a SMSF Investment Strategy is an important tool to ensure that you now where you are going and the desired target.
Call us today on 07 3421 0100 or email us info@mywealthcare.com.au to learn more and put theory into action!
Reference: Articled provided by Morningstar and Barbara Smith .
