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The superannuation industry is moving at a frantic pace and, as is often the case in a rapidly changing environment, legislation is ever so slightly lagging.
However, this won’t continue, with ASIC paying very close attention to the role of planners and brokers in the rush towards SMSFs.
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For most people, SMSF represents a big unknown – a pot of gold at the end of the career rainbow that you can magically put property into and a holiday cruise pops out the other end.
ASIC realises there is no magic involved, just a significant amount of financial planning nous, and this is the way they intend it to stay. It is not unforeseen to predict repercussions for low-grade planners, and even their broker partners, who lead superannuants away from industry funds and into ill-managed SMSF structures.
Calculations show a comfortable retirement costs around $813 a week, and $450 a week for a modest one, for someone who owns their home. To achieve that, women need to put away approximately 19.5 per cent of their salary from age 30, and men 17.5 per cent, on top of paying off their mortgage in advance of the end of their working lives.
Warnings are currently rippling through the industry that unless people work longer or top-up their compulsory superannuation guarantee to the tune of 200 per cent, they will find themselves with a paltry nest egg rather than the $300,000-plus sum they should have by age 65.
But research shows most people haven’t amassed anywhere near this figure, with the totals averaging $114,000 for men aged 60 to 65, and $94,000 for women in the same age bracket.
These are the figures that prompt people to seek ways to supercharge their superannuation, and ASIC can see that this leaves them vulnerable to receiving substandard advice. They may be encouraged to move away from industry funds and set up an SMSF to buy property which, under the right circumstances, is an extremely effective way to generate retirement income.
Investment property is a lucrative business while there is capital growth and tenants to bring in rent. But ASIC’s concern stems from property being purchased by SMSFs without enough funds to allow for diversification.
If all of the fund’s capital is concentrated in an asset that has limited ability to provide cash on retirement, without enough money to live on, retirees are more likely to be reliant on the aged pension.
ASIC’s preference is for diversified investment in SMSF to ensure dividends from shares, cash, fixed interest, and income from property are available to cover the cost of living in retirement.
With this in mind, forward-thinking lenders have amended their credit policy for SMSF loans to insist upon minimum asset positions, for example, to act in accordance with possible legislative movement governing the sector.
Clever advisers are ensuring they conduct due diligence on prospective SMSF establishment for property purchases. Brokers would do well to only do business with planners they know and trust so they can be comfortable their client has not been encouraged to put all their eggs in one basket.
They need to maintain clear visibility of all the SMSF products on the table so they can be sure the best product mix has been identified to suit their clients’ circumstances. It’s a cross-check that serves several purposes; it will give the SMSF the best chance of prospering and it is a demonstration of diligent service to the client.
Forewarned is forearmed and the MFAA offers an approved course on SMSF to help bring all facets of the industry up to speed. The safest and best way forward is to be informed about what is an emerging sector that is not without its pitfalls. Many planners and brokers are likely to make their share of missteps while they feel their way.
