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Retirement

My own reasons for early SMSF establishment

In response to a previous article on delaying establishing an SMSF, Meg explains why she started early, long before she began in the SMSF industry. Anyone who expects to build a decent super balance should think ahead.


I really enjoyed reading this article explaining why the author, Shani Jayamanne, isn’t yet ready for an SMSF. She had lots of good reasons for her decision. So it prompted me to reflect back on some of the reasons I felt I was ready at a similar stage of life and with an even smaller balance. And back then, I did work within the superannuation industry but not SMSFs. I wasn’t an obvious advocate of the ‘do it yourself’ model.

It probably helped that I was married to an accountant who did all the work. That’s a great life hack if ever there was one.

I knew my super balance would increase 

But there were other reasons. Like many others in my age group, I’ve had compulsory super at an ever-increasing percentage of my salary for my whole working life. So even back then, it was clear that my super would become a substantial part of my savings someday.

So I did my research and decided that ‘one day’ I would want to manage my super myself. I didn’t profess to have any great stock picking skills or plan to invest in exotic artwork or gold. My logic was that if I was taking responsibility for my retirement in such a big way, I wanted more control. So the question for me was not ‘if’ I’d have an SMSF, it was ‘when’.

Friction points

I didn’t necessarily want to manage it at that point in time, but I did want to make sure the friction of moving later didn’t cost me too much. At the time I probably only really appreciated one friction point – capital gains tax.

I knew that if I waited too long to move to an SMSF, my super would grow in value and I would incur capital gains tax moving my money when the time came. Would the future benefit of avoiding the tax outweigh the costs of running my SMSF with such a small balance in the interim? Possibly not, but it was a risk I was willing to take. If it didn't work for me, I could wind up the SMSF.

A second important friction point that I didn’t think about at the time was insurance.

Obtaining insurance is cheaper and easier, with fewer medical checks and restrictions, when you’re young, fit and healthy. While the premiums will increase each year, you can keep the same policy in place for as long as you like if it’s set up in your SMSF to begin with.

I recently arranged some life insurance outside my SMSF and it was a shock to see the price compared with the premium I was paying in my SMSF. The cover specifically excluded death or disability linked to my epilepsy which was not diagnosed when I took out insurance in my SMSF, and therefore I was still covered by that original policy. I definitely wouldn’t want to be setting up my SMSF now and trying to find cover. When I needed it, I had much more insurance than I could easily get in a public fund. It convinced me that the earlier the better when it comes to life insurance.

Some people solve this by keeping a small balance in their original public super fund just to keep their insurance running, but that can compromise some great tax planning opportunities that work best if the insurance is in the SMSF.

And there’s one last big reason to get started with your SMSF as early as possible that didn’t even occur to me back in the day. I’ll call it ‘resilience’.

Flexibility to change

If one thing is certain, it’s that things will change. The best public super fund when I set up my SMSF certainly isn’t the best today. It might not even exist. The best investments today won’t necessarily be where we want to put our money in the future, but super is about planning for the long term.

This is where an SMSF works well. You can change absolutely everything about your SMSF, such as where it invests, who helps you look after it, who belongs as members, who provides the insurance, etc, but you can leave the SMSF itself intact. It can change with you. Changes which would be significant in a public super fund can be handled less intrusively in an SMSF.

I’ve had an SMSF since I was in my 20s, starting in the 1990s. In all that time, I’ve never invested in anything as exotic as artwork, gold or crypto. I’ve never borrowed to buy property through my super. But if I wanted to do those things, I couldn’t have used a public offer fund.

I’ve invested in managed funds recommended by my financial adviser. Although some are mainstream, they were not on the menus of many public funds at the time. At the time, new funds often took many years to be added to public funds. In my SMSF, I’ve taken advantage of Initial Public Offerings (IPOs) and investment opportunities such as share buy backs and rights issues. These are common in investing but often not available in a public fund.

Move to pension phase

My fund now pays a pension and that was created instantly without moving assets to a different fund or investment account. My fund is still one investment portfolio and my accountant keeps track of how much is in the pension versus accumulation. Because I’m still working and contributing, the minimum pension payments are financed by my own super contributions. I don’t need to isolate a special cash reserves to pay the pension. In fact, if there were other members of my fund making super contributions, we could even use the cash from their contributions to pay my pension without disadvantaging them.

There are also some investments that I’ve owned for what seems like forever and if I sell them now, part of the capital gains will be exempt from tax (thank you, pension).

All in all, if you think you’re likely to end up in an SMSF ‘one day’, then that day might be sooner than you think.

And then to top it all off for me, just like the Remington electric shaver advertisement of my youth:

“I liked it so much I bought [or in my case, started] the company.”

Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.



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