How to dodge a super pitfall

While it’s tempting to borrow to buy property for an SMSF, getting the right advice is imperative.

Using superannuation to buy an investment property is becoming immensely popular with baby boomers. Do-it-yourself super is by far the fastest-growing segment of superannuation, with about $14 billion in superannuation being transferred out of externally managed funds each year and put into self-managed super funds.

For many SMSF trustees, property ticks all the right boxes. While rent is usually a steady, reliable income, once you’re on a pension, you can sell properties free of capital gains tax.

But if you intend to hold property in an SMSF, you need high-quality, unbiased advice. This applies not only to the way you set up and administer an SMSF, but also to advice about the type of property in which to invest.

It’s all too easy to be burnt financially if your SMSF borrows to buy an underperforming asset. The chances of falling victim to a spruiker or an unethical adviser are also quite high.

The Australian Securities and Investments Commission is devoting more time and energy looking at risks in the self-managed superannuation sector.

In April, the financial services industry regulator released a report from a taskforce it set up to look at the quality of advice given to people establishing SMSFs. The report showed most advice was adequate or good, but it highlighted problems relating to funds that borrowed to invest in property.

The commission established the taskforce seven months ago because of the growth in the number of SMSFs, an increase in geared investment strategies within superannuation, and several high-profile collapses of financial institutions. New rules governing the delivery of financial advice prohibit financial planners and advisers from receiving commissions from product suppliers. The federal government has also put these advisers under a legal obligation to act in their clients’ best interests.

Watch out, though. Anyone calling themselves a buyer’s advocate or a property adviser isn’t subject to the tighter rules faced by financial planners. These players can be paid commissions, which you may or may not know about.

ASIC says the top tHicks Real Estatee reasons people set up SMSFs are: to have greater control over their investments; the ability to choose specific stocks in which to invest; and a belief that they can make better investment decisions than externally managed funds. Another key reason people set up an SMSF is because they are advised to by a third party.

Those going down the DIY super path need to tread carefully. Always consider using a licensed financial planner, and seek broad-based investment advice.

ASIC reviewed more than 100 SMSFs and conducted surveillance of 18 entities involved in setting them up. The reviews in which the advice was considered poor were almost exclusively SMSFs set up to buy property using borrowed funds. In most cases, the advice was not tailored to the investor’s situation, nor were the investor’s long-term retirement goals considered.

ASIC’s senior executive leader for financial literacy and consumers, Delia Rickard, says research shows that those who get the best advice are not necessarily those with the most money.

”They are the ones who have taken the time to inform themselves, who can ask the right questions and who can engage with the adviser,” she says. ”They can take away any financial plan that’s provided and have some basis to work out, ‘Does this look right for me?”’

Story by Chris Tolhurst, Story source: www.domain.com.au