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Switching an SMSF: Watch the fine print

Tags Retirement Planning
Category SMSF

An image of a a foot treading on a banana skin

Switching an SMSF (self-managed super fund) has become an increasingly attractive option for Australians. In the last financial year, around 3000 new SMSFs were established every month in the second-highest fund growth rate since 1995.

However, before making the switch it is advisable to check the terms and conditions as a raft of insurance, legal and other issues have the potential to cause problems later.

SMSF specialist advisor Liam Shorte, author of “The SMSF Coach” blog, says there is no reason to put your future at risk by ignoring the legal and insurance issues involved in changing.

Legal considerations

Different rules are applicable depending on whether a fund has individuals or a corporate trustee, but Shorte suggests the latter option is more user-friendly.

“My recommendation is always to go for a corporate trustee for ease of management and transfer of control, asset protection and personal protection against liability claims from people contracted to work on SMSF properties who might get injured,” he said.

Check insurance

New SMSF rules introduced in August 2012 require trustees to consider members’ insurance needs regularly, a move that may have been sparked by a 2010 report showing that fewer than 13 per cent of funds have insurance.

Under the new regulations, trustees must consider whether insurance cover should be held by the fund on the lives of members.

Shorte suggests assessing your insurance needs before switching funds, with one option being keeping sufficient funds in the current fund to pay for ongoing insurance premiums or taking out replacement insurance cover in the name of the new SMSF.

“Your existing fund may have been underwritten under group terms which are more competitive than standalone policies, so keeping a small amount in the fund to cover premiums may save a considerable amount of money over time.”

It’s important to consider your current health, occupation and lifestyle factors to judge whether you could replace the cover, with some insurers restricting coverage for those working from home or in more dangerous occupations such as mining.

“Be careful when transferring cover to read the policies to ensure you are getting like for like cover, as you don’t want a huge surprise at claim time.”

Do the research

Like any other investment decision, it’s important to do the research to make sure the switch stacks up financially.

“Don’t act in haste and don’t look too short-term at investments, as last year’s dog could be this year’s top performer. If the switch is for control reasons, then look carefully at your current fund or a super wrap to see if you can actually gain control over investments and the clarity you require without incurring the costs of an SMSF.

“Make sure you put the effort into researching the best option and seek advice from different parties. Don’t just search for low fees, as with everything else in life it might come back to bite you!”

For those switching an SMSF, free advice is available from the Australian Taxation Office and ASIC websites, with a free SMSF trustee course available at www.smsftrustee.com.

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