Consider using equity in your own home to fund SMSF investing. Best to be neutrally or positively geared in case of redundancy, injury or illness that reduces capacity to work
The average superannuation balance for Australians aged 45-54 is $151,500 for males and $90,800 for females. Australians aged 55-64 have an average balance of $322,000 for males and $180,000 for females. That really is not much.
I call the last 10 years of working life the “home run” decade. It is the last chance you have to properly set up a plan to maximise the capital you have to support an income stream in retirement. The biggest problem I come across with some new clients is they only start to get serious about retirement planning about three years before they plan to retire. This is too late to start planning. At three years out, it’s about accepting your fate and settling with the fact that you may not achieve anything near what you expected you would have.
There is plenty of material about maximising concessional contributions and non-concessional contributions as a plan for retirement. Yes, this is a basic strategy and it works. With recent federal budget changes, the days of transition-to-retirement pensions are pretty much gone.
What can you do as well as the basics mentioned above that are already widely published?
Look at the equity in your home. For many Australians aged 50-55, their children are now beginning to be financially independent. There is a transition happening between household expenses lowering and savings increasing. Plus, there is now substantial equity in the home.
Many would naturally think about using this equity to buy assets such as shares and property in their own name. However, this means that you have assets that have their income and capital growth taxed at your marginal tax rate.
Here is an idea for consideration: Consider moderate gearing levels.
The ATO in their Practical Compliance Guidelines 2016/5 published in April, set out very clearly how people can lend money to their self-managed superannuation fund.
What this means is a couple or individual can access some of the equity in their home via a line of credit. They can then lend this money to their own self-managed superannuation fund. This is called a ‘member loan’ or the fancy technical name is a Limited Recourse Borrowing Arrangement (LRBA). The great aspect of this ATO guideline is it tells us what level of gearing one can have inside super for buying property – 70 per cent Loan to Value Ratio (LVR) or shares 50 per cent LVR. It tells what interest rate must be charged to the superannuation fund, the term of the loan and that a mortgage needs to be registered over the property. The guidelines make it very clear how to structure a member loan or LRBA to be compliant in the eyes of the ATO.
The benefit of this strategy is the assets are now owned in a concessionally taxed environment. As current legislation stands, once the asset is sold when the superannuation fund members are retired and drawing a pension there is no capital gains tax. The loan can be paid out at any time.
In principle, if you have a property purchase or share portfolio that have loan-to-value ratio of between 30 per cent to 40 per cent, the rental income or dividend income will generally be sufficient to cover the interest costs of the loan. Thus, your asset is neutrally or positively geared.
This is a smart strategy to ensure any borrowings are neutrally geared in the event of redundancy, injury or illness that reduces one’s capacity to work. If the asset pays for itself there is no drain on cash flow if income is reduced or lost and it gives ample time to decide if it is appropriate to sell the asset.
Finally, if you are in your home run decade, beware of putting yourself into debt up to your eyeballs. If you are made redundant or fall ill and cannot work, you may have problems to consider.
Andrew Zbik, senior financial planner, Omniwealth