Uninformed risk losing super savings

UP TO two out of three people in self-managed super funds risk prosecution and even jail because they do not know the basics of how to run their super fund properly.

Uninformed risk losing super savings

UP TO two out of three people in self-managed super funds risk prosecution and even jail because they do not know the basics of how to run their super fund properly.

Many more also face losing large chunks of their savings because they are not compliant with superannuation and tax laws.

The government last week stepped up plans to more closely monitor the self-managed super sector as concerns grow about unskilled people trying to manage their retirement savings.

The industry is also becoming worried about a new trend for DIY funds to take on debt to buy property investments which might mean they are not properly diversify their portfolios.

About 21 per cent of trustees have a "low to medium" or "low" knowledge of their obligations, according to a new survey of self-managed super funds by the tax office.

The survey also found more than 30 per cent of new trustees could not provide an explanation of the sole purpose test and more than 15 per cent did not have an investment strategy, as required by law.

In addition, 25 per cent of trustees did not know the restrictions on types of assets that can be acquired from related parties of a self-managed fund.

Although self-managed schemes typically appeal to older, higher wealth couples, families and business owners, there is a growing trend now for younger and less wealthy people to self-manage.

There are now almost 50,000 under 35 year olds who have started a self-managed scheme.

And almost one third of self-managed schemes have less than $200,000 in total assets. That is less than most professionals recommend as a minimum viable asset base for a self-managed scheme.

The operating costs for a super fund with $200,000 are in the range of 2.63 per cent to 3.55 per cent of assets a year, which is around double the costs of a low priced industry super fund.

"The latest data shows a significant overweighting of SMSF investments in cash, debt, securities and term deposits, many in excess of 35 per cent of their total assets, well beyond the norm for a long-term diversified investment strategy," superannuation and financial services minister Senator Nick Sherry said.

According to Mercer investment partner David Knox the problem of trustees not being aware of their responsibilities was growing.

"It is fair to say that many SMSF trustees have got into it for control reasons, to manage their affairs without really having a good understanding of risk in investment markets," Dr Knox said.

"But you can't apply the same rules to SMSFs as to other funds.

"Self-managed schemes are typically a husband a wife, they are both members and trustees, they are looking after their own money, whereas other super fund trustees are looking after other people's money.

"There may be SMSFs run by small business owners where the super fund is providing loans or equity back to the business, that is not good idea."

A major area of concern for the government and industry is marketing of complex debt products to self-managed super schemes.

As of late last year, super funds can borrow money to buy investment properties using a debt instrument known as an instalment warrant.

The loans must be limited recourse, meaning the lender can only get back the value of the asset, not the entire loan outstanding, if the investment fails. Maximum loan to valuation ratios of 80 and 85 per cent also apply.

Lenders have begun releasing new packaged instalment warrants for SMSFs which increasingly are being marketed by brokers and loan originators. This is a new marketplace that is just starting to operate.

Shaun Moss is a director of new company Australian Commercial Funding which specialises in packaging instalment warrant loans for self-managed super funds.

"There is only a couple of lenders in the market at the moment that are geared up for self-managed super funds but there will be more very soon," Mr Moss said.

He said there are few risks involved with instalment warrants if the fund trustees are educated about super and complying with their legal obligations.

"Property in Australia is a lot safer investment than equities, which can be funded with a margin loan.

"The important thing is that these property loans to SMSFs are limited recourse, so the capital is safe at all times."