Australian former Prime Minister, Paul Keating, has made headlines by warning against a potential pending ‘accident’ with self-managed super funds. Keating was the architect of compulsory superannuation so his warning does carry some merit. But is all that Keating says a reality and should be pay attention to the SMSF ‘accident’ of which he warns? Herein we weigh the realities.
What is the warning?
Keating’s warning suggests that borrowing money with SMSFs can lead to potential losses and financial damage being caused to the superannuation funds of investors. He argues that if SMSF loans are used to borrow for investment in property then the SMSF itself is at risk if there is a crash in the real estate market. With private lending available within SMSFs it is possible to borrow for investments in stocks, real estate and other investments and for many this has been a readily accessible way through which investment can be made into the future value of superannuations. The warning from Keating suggests that this form of borrowing could lead to an ‘accident’ that would wipe out large proportions of people’s self-managed superannuation funds.
How safe are SMSFs?
The reality is that SMSF loans are a secure and safe form of borrowing that can allow you to purchase assets or stocks to tide you by with an income in your retirement. When borrowing through your SMSF against property it is possible to secure the loan exactly as you would with a home loan, allowing you to use the house as equity against the borrowing. While you could be at risk if the house value dropped dramatically, as long as your borrowing level is reasonable you will still have a valuable asset in your possession. Property purchased through SMSF loans is as secure as property purchased using a home loan.
What are the benefits of SMSF loans?
There are many benefits to borrowing from private lenders through SMSFs but the most important are that these loans allow you to grow your retirement fund faster and allow you to reduce the level of capital gains tax that you will pay. Within an SMSF, capital gains tax is capped at 10% meaning you can make dramatic savings while increasing your retirement wealth dramatically. By investing through your SMSF you are also able to leverage money that it is not otherwise possible to access so that you can increase your retirement wealth instead of relying on interest alone.
How can you protect yourself with SMSF loans?
Keating certainly does have valid concerns where borrowing can reach up to 100% of the value of the property being purchased. Where this is the case it can be risky because a drop in value could leave you struggling to make the repayments and this could put your superannuation fund at risk. Where borrowing is contained to a reasonable level, however, it is possible to ensure that you are always in the black and changes in value will not impact you dramatically. Investment with SMSF loans remains a strong and stable investment but it is sensible to borrow at an affordable level instead of taking borrowing to the maximum and exposing yourself to risk.