Recently we heard a saddening story of a Mum and Dad investor losing their entire Self-Managed Super Fund (SMSF). This is what transpired.
The couple ran a small business and they were persuaded to set up a SMSF with a balance of $100,000, establish a Limited Recourse Borrowing Arrangement (LRBA) and buy an ‘off the plan’ apartment.
They were told everyone was using the strategy and it was 'safe as houses'. It sounded compelling, use their SMSF to fund the deposit (20%), borrow the rest from a bank (80%), buy in a growth area, and service the mortgage with rental income and super contributions – too easy. It was sold as a great way to double their money every seven years and retire comfortably with no need for the age pension.
Soon after buying the apartment, the rent was lower than the spruiker suggested and their small business suffered a downturn which prevented them from making super contributions. Subsequently they were unable to service the mortgage. After several months of missed repayments the bank called in the mortgage forcing them to sell the apartment. They believed it would be fine if they sold quickly, the only problem was there were hundreds of similar apartments on the market and soon discovered they had paid above odds in the first place to fund the spruiker’s secret commission. Sadly the apartment was sold well below their purchase price.
In the wash up, the bank received their share back and the SMSF was left with nothing! They had lost their entire retirement savings in a matter of months.
To make matters worse, after sale costs, bank penalties, legal, accounting and audit fees flooded in, their SMSF was left with a negative balance. That’s right a negative super balance!
They were left with no retirement savings, costs to pay and a SMSF compliance nightmare, meanwhile the property spruiker walked away with a juicy $30,000 commission.
It is difficult to think of a circumstance where it is reasonable to recommend a rookie invest 100% of their retirement savings in a complex and geared investment. This spruiking needs to be stamped out before we learn of more SMSFs in ruin.
