Borrowing to invest within your Self-Managed Super Fund (SMSF) has the potential to boost your super and help you reach your retirement goals sooner.

In September 2007, the Government opened the door to Gearing within SMSFs – meaning it’s now possible to borrow to invest in a broad range of investments inside a SMSF.

It’s great news if you’ve got a SMSF – especially if you’ve been thinking it’s a good time to invest. But, as with any Gearing strategy, it presents some potential risks too.

Gearing in super – how it works

You need cash within your SMSF. Your SMSF then borrows an amount from a lender. You then use this combined purchasing power to invest in assets.

Under the rules, this asset could be shares, property, managed funds, or even art or antiques – bearing in mind the rules around your choice of asset are quite specific.

The ‘beneficial ownership’ of the asset is held in trust. This gives the trustee (you) the right to receive income from the asset, and the right to take legal ownership through the payment of instalments.

Ongoing, any income earned by the asset goes into your SMSF, which is also responsible for paying the bank interest on the loan.

What are the benefits?

• Diversification - with more money to invest, you can buy assets you otherwise couldn't afford. This can provide Diversification benefits to your Portfolio.
  
  

• Tax effectiveness - as opposed to Gearing outside super, you can take advantage of the tax-effectiveness of the superannuation environment - including the ability to make tax-free withdrawals after age 60. Interest on the borrowed money is generally tax-deductible too.
  
  

• Your exposure is limited - legally, the loan from the bank must be ‘limited recourse' in nature - meaning the bank only has rights against the asset purchased with the borrowed money, not your other super or personal assets.

What are the risks?

• Magnified losses as well as gains - just as Gearing magnifies your potential returns, it also magnifies your potential losses.
  
  

• Your loan does not change with the markets - a fall in the market doesn't change the amount you owe the lender, or the amount you are required to pay in interest.
  
  

• Interest costs may outweigh investment returns - if interest costs significantly outweigh investment returns, this shortfall must be funded. It may be covered by the income from non-geared investments or you may need to contribute additional funds to your SMSF.
  
  

• A margin call may occur - if the value of your investment drops below a ‘buffer' set by the lender, a ‘Margin call' may occur - whereby you must have cash available to top-up your investment, or sell some of your investments to reduce the LVR.
  
  

• Interest rate changes - changes in interest rates can impact the effectiveness of your Gearing strategy.

Who is Gearing suitable for?

Because of the risks, Gearing in super is rarely suitable for conservative investors. But having an appetite for investment Risk is only part of the equation.

Generally speaking, you need to have a SMSF with at least a $200,000 balance before you would consider Gearing in super. To help mitigate the risks, you also need to maintain adequate cash flow - so it's most suitable to those who are still working.

Most importantly, Gearing in super should be seen as a long-term strategy. Typically an investment timeframe of about 7 to 10 years is recommended to help you ride out the inevitable highs and lows.

With so many rules and regulations around Gearing in super, it's essential to get the details right from day one. So if you think a Gearing in super strategy might be suitable for you, you should speak to us.

Further information:

We can offer you a complete and detailed financial planning package - including investment, superannuation, retirement, insurance and banking solutions. We are able to work with you to determine the best financial plan for your particular needs and circumstances.

Specialising in technical excellence and recognising the complex legislation that governs investment, tax and superannuation,we are able to work within this regulatory framework to develop innovative financial planning solutions for you, especially in the areas of wealth accumulation, superannuation and retirement planning. Using a combination of the right technical advice and the right investment strategies, as SECURITOR financial advisers we can add significant value to your financial affairs over the long-term.

SECURITOR is one of Australia's largest dealer groups with 430 Authorised Representatives located throughout Australia, managing more than $6 billion for over 50,000 clients. SECURITOR is supported by SEALCORP, one of Australia's largest suppliers of financial products and services to financial advisers. SEALCORP is part of the St.George group.

IMPORTANT INFORMATION:

This information was prepared by SECURITOR Financial Group Limited ABN 48 009 189 495 Australian Financial Services Licence Number 240687. To the extent permitted by law, no liability is accepted for loss or damage as a result of reliance on this information.

The investment information or general advice provided in this publication does not take into account your personal objectives, financial situation or needs and because of that, you should consider the appropriateness of the information or advice having regard to these factors.

In deciding whether to acquire, or continue to hold, a financial product, you should consider the relevant Product Disclosure Statement for that product. Copies can be obtained from your financial adviser.

Tags:  superannuation, gearing,