My last post – SMSF Scepticism (Or What To Do With That Property) – captured some of my thoughts on the ever-rolling dirty snowball that is SMSFs, LRBAs and crummy investment properties.

In my (misguided) attempt at balance, the second half of my post listed the positives of an SMSF.

Well, there’ll be no such balance in this week’s post – this week’s all about the negatives for clients when they find themselves managing a self-managed super fund they perhaps didn’t plan on having.

There are, of course, positives to having an SMSF – I run through some of them here – but I want the people we work with to have a fulsome picture of the complexity, opportunity and challenge of being entirely responsible for their own retirement savings.

So, let’s dive in!

Let’s Go

Negative 1: Liquidity

Say you’ve inherited an SMSF with a balance of $1m.

And say that, of the $1m, $900k is invested in a house in Melbourne. And it’s paying you – after costs and taxes – $20,000 a year.

The plan was to keep it for the long-term, pay down the loan then, in retirement, live off the rent.

Except now you’re retiring, and you’ve worked out you need $80,000 a year to live. You simply don’t have enough cash in your fund to meet your living expenses.

It’s utterly reasonable to be asking yourself what to do with that property now – and to now really feel comfortable making that call yet.

However, your time’s a little limited. You can pull out the $20,000 and run down the $100,000 in cash you have in there.

But that’ll all be gone after 21 months. Then what?

You can’t sell the fourth bedroom to release some cash.

This is what we mean when we talk about liquidity – you can’t convert a property to cash very quickly.

Negative 2: Costs

We’ll start with the consistently rising ongoing costs that come with owning a property.

There are the obvious ones – property management, council rates, insurances, loan repayments

Then there are the ones that spruiker in the nice shoes and leased car doesn’t tell you about:

• A stitch in time saves nine, but still costs around 1%-4% a year.
• Hear the one about the hot water service that leaked for the tenants entire six-week holiday?
• Rental Rate Reluctance. No, not tenants reluctance to pay their rent. I’m talking about owners understandable reluctance to raise the rent each year because they ‘have good tenants’.

Again – this isn’t the usual adviser diatribe painting all property investments as awful (people still expect me to tell them shares are better).

Property can be great, and it can be awful.

Shares can be great, and they can be awful.

Cash can be great, and it can be awful.

Instead, it’s a call for all of us to look at all investments with a realistic lens, so people can make intentional decisions with the full picture to hand.

And this is before we talk about the costs that come with running your SMSF.

Negative 3 –The Cost of Running The Fund

It’s easy to overcook this particular egg, because simply saying ‘SMSFs are more/less expensive’ doesn’t capture the whole story.

However, you may have noticed by now just how many fees there are that come with having a SMSF.

There are, broadly, three levels of fees in any superannuation fund:

• Administration
• Investment
• Advice

For most super funds, the first two are percentage based, while the last one is often a fixed fee.

But in an SMSF, many of the other fees are fixed.

As an example:

Say you have $500,000 in a standard industry super fund, where you’re paying 0.35% a year in administration fees, 0.60% a year in investment fees and no advisory fees. That’s $4,750 a year in fees.

Compare that to an SMSF and you’re looking at a few thousand dollars for administration, accounting and auditing costs. There are registration fees, investment fees, and – possible if you’ve inherited your late partners team – advisory fees.

These ongoing costs add up pretty rapidly. And, like all fixed fees, the more you have in there the more economical these fees become.

$10,000 in annual costs on a $200,000 balance is 5% a year.

$10,000 in annual costs on a $1,000,000 balance is 1% a year.

Again, these aren’t bad in isolation.

But, and if it feels like I’m repeating myself it’s because I am, these decisions need to be fully informed and intentional, within the context of your individual financial priorities, needs and wants.

Negative 4 – Actually Running Your SMSF

Let’s look at what running an SMSF often looks like. Or, how they’ve often started.

For far too many people, it’s a conversation between them and their ‘adviser’ (not financial adviser, I should note):

• “I don’t like my super”
• “Have you thought about managing it yourself?”
• “Sure, but sounds hard?”
• “Nah, I’ll help you with it. Lot of paperwork, but it’s a piece of cake when you’ve got good help.”
• “Mm, ok. My brother-in-law won’t shut up about his, so why not.”
• <Cue quick skim over trustee responsibilities, risks, and obligations>.

Meanwhile, they’ve:

• Given up most of their legislative protections.
• Said goodbye to any compensation channels.
• Not remembered/not been told about all their obligations.
• Already forgotten about all the lodgement rules and dates.

I’m being snarky, but the point is – running an SMSF properly is difficult.

It’s supposed to be.

Yes, good advice and service can lighten the burden, but ultimately, it’s your responsibility.

And if that’s a burden you’re not interested in carrying now that it’s sitting solely on your shoulders – then it’s natural to be having doubts about what to do next.

Because no matter what people like me say – it’s your responsibility.

At the end of it all, you’re the one who’s signing off on the returns and documents and making all the final decisions.

Yes, if things go awry, you can pursue the service providers that failed in their duties – but is that really something you want to have to worry about?

I’ll say it again – SMSFs are a tool which, in the right hands, provide tremendous benefits and advantages.

But in the wrong hands, much like a chainsaw, they will cut you up.

Negative 5 – Borrowing

You may very well have inherited a loan within the SMSF your partner has left behind.

These have generally been arranged so the fund can purchase a big, chunky asset that it couldn’t afford on its own. And this is done so the fund can access the potential upside that can come from buying such an asset.

However, much like gravity, the fundamental rules of financial nature apply to debt with an SMSF too.

If the asset goes up, fantastic.

If it goes down, uh-oh.

Sure, the bank can’t call on the other assets in the fund.

But a poorly performing asset – perhaps a property without a tenant, or a warehouse your business has outgrown, or an apartment in a dead market – is still a drain on your fund, your resources and your mind.

Loans work when they lever against the fulcrum of time and growth to accelerate your returns. However, that fulcrum can flip and that leverage can go backwards.

Because it’s not ‘just’ a loan – as an adviser can tell you.

There are complexities and costs and considerations. Limited recourse borrowing arrangements. Bare trusts. Sole purpose tests. Lender requirements.

Again, when used properly debt can be a fantastic source of fuel for the rocket of your personal wealth.

But, without the proper safeguards or care, it can also blow that same rocket to pieces.

 

SMSFs, like all financial investments, options and choices, come with pros and cons. There are complexities and considerations we all need to make when making decisions about what to do with our money,

So if you’re having doubts about the role the SMSF you’ve inherited should be playing in your financial life, that’s not unusual and not unreasonable.

Raise those concerns with the people helping you with the fund, and they’ll help you make everything fit together that little bit better.

And, if they don’t, well, feel free to reach out and have a chat with us.

 

PS: Some Resources To Check Out

I’ve linked to a few pieces in this little diatribe of mine, but here are some more resources I really suggest checking out if you’re having doubts about the SMSF you’ve inherited.

The Australian Tax Office is the primary regulator of SMSFs, so their page is particularly useful.

This infographic they provide is handy if you’re a data nerd like me, but of limited use when it comes to deciding on your specific situation.

ASICs MoneySmart page is an absolutely goldmine of useful information for people, and their SMSF page is especially useful.

Their remit tends to cover the products within the fund and the advice licensed financial advisers (like me) give about them, so their perspective is a little different.

Finally, the Ombudsman (Australian Financial Complaints Authority) has a good summary of who can, and can’t, make a complaint about SMSFs here.

I didn’t really get into it in this piece, but you should know that SMSF trustees and members do not have access to many of the avenues of recourse that members of other, standard super funds do.