5 smart steps for DIY super trustees
Tuesday, 26 February 2008
Last Updated: Wednesday, 27 February 2008
By Michael Laurence
DIY super fund trustees need to understand what’s at stake with gearing a DIY fund – and that there are smarter steps to take to boost your fund.
Trustees of self-managed super funds shouldn’t sign up for any of the new gearing products being promoted to their funds without first understanding a fundamental fact. They may be putting a huge chunk of their retirement savings on the line.
These products can carry a level of risk that may not be readily recognised, particularly by inexperienced fund trustees.
The bottom-line is that a sharp fall in the value of a geared asset could wipe out a significant proportion of the fund members’ retirement savings – depending on the circumstances, including the level of borrowing and the overall diversity of a fund’s investments. (See our top five tips on the following pages.)
Since the superannuation law was amended in September last year to unequivocally permit self-managed funds to borrow to invest under stringent conditions, lawyers, superannuation specialists and financial institutions have been designing new gearing products and facilities targeting these funds.
The amendments are an exception to the long-standing and remaining general ban on borrowing to invest by self-managed funds.
Expect gearing products to come on to the market in growing numbers over the next few months to enable self-managed funds to gear into residential and commercial property, listed shares, and managed investment funds.
For instance, the Macquarie Bank last week released a product called Property Lever for self-managed funds to gear into the residential properties of their choice. And the investment bank intends to launch other specialist gearing products aimed at these funds.
Make no mistake. The new gearing products may open some exciting opportunities for self-managed funds whose trustees invest for the long-term in top-quality, well-priced assets.
As I have written previously in my SmartCompany column, smaller business owners, for example, can use the new gearing opportunities to enable their self-managed funds to buy their business premises, which can then be rented back to their businesses for commercial rates.
But I cannot overemphasise that fund trustees should fully comprehend the extent of risks involved before entering these arrangements, and consider gaining quality investment and superannuation advice from quality licensed advisers.
As Sydney tax and superannuation lawyer Robert Richards says: “Any gearing [whether inside or outside a super fund] is an additional risk. It’s the old story; gearing can maximise profits but it can maximise losses.”
And Dean Firth, executive director of Macquarie Relationship Banking, told SmartCompany: “Aggressive gearing shouldn’t be in a super fund. At the end of the day, it is retirement money.”
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