One pitfall you need to avoid when managing your own super

Self-managed super funds (SMSF) have plenty of plus-points: a bigger investment choice, the ability to use gearing, and even potentially lower costs.

But there is one little-addressed downside to owning a SMSF – it can seriously complicate a relationship breakdown, unless the fund’s owners have done their homework.

“The majority of SMSFs operate as a two-person fund, most often partners,” Nerida Cole, head of financial advisory at Dixon Advisory and Superannuation Services, says.

“And the big benefit of an SMSF is this joint approach, because you have cost efficiencies from pooling your funds, having the administration combined, and advisers working for both of you at once. But it can make the situation more complex if you do split.”

So, with Aussies are increasingly using SMSFs to invest in buy-to-lets – almost $25 billion worth of residential property currently sits in such funds – Starts at 60 asked the experts what steps SMSF-owners can take to protect themselves against the impact of a separation or divorce.

What’s ‘yours’ isn’t necessarily yours

“It’s so common that people think ‘it comes from my income so it’s mine,’ but the law says that it if it was built up when you were together, it’s a joint asset,” Steven Edward, joint practice group leader for Victoria at Slater and Gordon’s family law division, says.

“Super funds are part of the asset pool between husband and wife and they can be divided.”

Edward explains that there several ways to divvy up a super pile, including allowing one person to keep the fund while the other gets a greater share of other assets, or transferring some of the fund’s assets into a separate fund for one partner.

Have strong values

Any super-split agreement must be based on current valuations of the assets, or it risks being set aside by a court down the track if one person later feels that they got an unfair share, the lawyer warns.

“You can’t rely on an estimate from the fund’s annual report a year ago,” Edward says. “It leaves grounds to challenge the agreement later and professional advisers can even be sued for not ensuring valuations are current.”

That’s the case no matter whether your self-managed fund is full of Penfolds Grange Hermitage or rental properties, he adds – a current market value is available for almost every kind of asset.

Under local family law, there are no rules setting out precise ‘percentage splits’ for a couple’s assets – the division is almost entirely based on each person’s contribution, with factors such as earning capacity, childcare and health issues also taken into consideration – but Edward says super is normally divided 50-50.

Keep it amicable

A hotly disputed property settlement can take months or even years to finalise, leaving the SMSF in limbo. But partners with assets in an SMSF of which they’re both trustees are permitted under super regulations, if they can come to an agreement about divvying up their fund, to roll assets out of the joint fund into separate funds before an official settlement is reached.

“Although in some circumstances, you will need to stick with the fund until a final agreement is made with the court, or in an out of court agreement, it is possible to separate your individual account balances,” Cole says.

“But both trustees must agree to this and we recommend before they do this both must seek individual legal advice. So, there may be more flexibility than most people realise, particularly if both partners are well informed and have been equally involved in the operations of the fund.”

Know the lingo

The grounds on which a couple agree to separate their assets can have an impact on the type of settlement agreement used, so it makes sense to understand the small print, Edward explains.

For example, ‘consent orders’ and ‘binding financial agreements’ are both types of property settlement, but ones that can put very different timelines transfer of an SMSF asset such as an investment property from one partner to another.

Likewise, whether a couple choose a ‘base amount split’ or a ‘percentage split’ can be affected by whether an asset is being moved from an SMSF into another SMSF, so it pays to understand the nature of your settlement, Edward says.

Keep your papers in order

A super-split situation can reveal whether a SMSF has been properly administered, so Edward recommends keeping a close eye on compliance with the appropriate regulations at all times or risk ending up in an even messier legal battle when any mismanagement or misuse of the fund comes to light.

“If a fund is non-compliant, there’ll be heavy tax penalties that can dwarf the fund asset values,” Edward warns. “That can also lead to costly legal disputes on who’s responsible for the non-compliance.”

Where there’s a will, there’s a way

“It’s vital that if people have a property settlement, they ensure their will is up to date,” Edward says, explaining that many couples don’t follow up their property settlement by legally divorcing.

This means that if either person then dies without a will that sets out who should receive their post-split assets, their ex-partner can apply to effectively have the property settlement undone and the assets returned to them.

“A property settlement isn’t a divorce. You can get a property settlement five minutes after splitting up but a divorce is only possible after 12 months,” Edward says.

Understand your assets

In earlier decades, courts typically awarded the family home to the female partner on the understanding that she would continue to care for the children in it, while the male partner usually received the super fund’s value.

But Cole says it’s more common now for assets of all classes to be split equally amongst partners, which means that women have more incentive than ever to understand the workings of their retirement savings.

This imperative is particularly strong in the case of SMSFs because of the possibility of splitting the fund’s assets ahead of an official settlement as long as both partners had equal involvement in the fund.

“This is a really good reason for women to get involved in the management of their own fund – it won’t be such a leap for them then to get a handle on it later on, should they need to,” Cole says.

How would you divide your assets in a split? Do you consider unforeseen events when planning your retirement? How ‘future-proof’ do you feel about your wealth?