Self Managed Super Fund – For Better Returns Borrow.

By Jason Fittler
One of the big issues in the 2008 year will be borrowing through your Super Fund; under new legislation passed recently you now have the ability to borrow in a super fund. But before you rush out and start borrowing there are plenty of rules which go along with this new found freedom.

Warning:
There will no doubt be many fancy spruikers hitting the streets soon with some fantastic ideas of how to separate you from your super while offering to improve your super fund return through the use of gearing. Be aware of this and please do not put your money into anything until you speak with us first, even if you are not our client.

But it’s not all bad news, if you are like me and a sensible investor looking to use these new rules to help grow your super in a sensible manner, the new rules provide you with two basic opportunities. Now you have the ability to borrow through the super fund and buy shares or property. Property is straight forward and we all know how residential investment property works. But what about shares?

To take advantage of this new legislation to provide superior returns in your self managed super fund we are able to use a product of self funding instalment warrants. These work much the same as a lay by, you pay half now and the rest off over the next 10 years through the dividends. Let’s look at an example;

Example One
You have $20,000 to invest in your super fund and you decide to buy Suncorp in 1998 at $7.00 per share. You purchase 2800 shares. Over the next 10 years you would have received $7.32 in dividends and $10.00 growth in the share price. Overall this is a return of $48,496 or 242%.

Example Two
You invest the same $20,000 but this time into Suncorp Self Funding Instalment Warrants. These cost $3.50 up front as such you can buy twice as many warrants being 5600 and you owe another $3.50 per warrant or $19,600. This amount owing is paid down through the dividends. Keep in mind that you are entitled to the full dividend on all the warrants you hold.

Over the next ten years you receive the same $7.32 dividend per share being $40,992. Of this $19,600 goes towards paying back your loan leaving you $21,392. Once the loan is paid out the warrants are converted to shares so you now hold 5600 share which have gone up $10.00 in price over the past 10 years being a gain of $56,000 plus the surplus dividend of $21,392 giving you a total return of $77,392 or 386%. For the same $20,000 investment.

Summary
These new laws allow you to add some real punch to your superfund through a sensible investment strategy. Through buying big blue chip shares using self funding instalment warrants you can boost the return of your super and provide yourself with a better retirement.

The major benefit is that this product is available now and very simple to use. If you are thinking about buying property using the new borrowing rules you will soon find out that it is complicated and costly.
 
Worried about the compliance?  Don’t…We take care of all of that for you. To really grow your super SMSF will have the best results. Call us today if you would like to discuss this further with one of our financial planners. Phone (07) 4771 4577