Borrowing money to invest in superannuation can be a rewarding strategy for many investors wanting to take advantage of the changes to superannuation laws but without ready access to liquid assets, according to Commonwealth Bank general manager geared investments Craig Keary.
To help advisers demonstrate how these strategies can work to their clients’ advantage, Colonial Geared Investments has developed a calculator financial planners can use in conjunction with a number of formulated case study examples.
The case studies and calculator provided are to help advisers illustrate the difference borrowing to invest in can make for clients in comparison to other strategies such as selling off property or selling segments of a share portfolio, and have been formulated on the basis of constructing a 10-year investment plan for the client.
“We’ve gone through the various ranges of clients as to how suitable they are for these strategies . . . Where we think there is an opportunity is in the 40 to 50-year-old and the 50 to 60-year-old brackets,” Keary said.
The gearing options outlined are considered by Colonial to be conservative and involve borrowing around $400,000 against the family home or taking out a margin loan to 50 per cent of the value of a well-diversified equities portfolio.
The outcomes than can be achieved through borrowing to invest in super, according to Colonial, include developing a larger superannuation fund value that will further compound over time, being able to retain non-super assets thus avoiding the triggering of capital gains tax events, and achievement of wealth creation goals earlier than expected due to the returns produced by several different assets.
Keary recognises there are potential pitfalls with the gearing strategies that advisers should be aware of before suggesting such moves for their clients.
“The big pitfall is what are you going to do after 10 years. If a client doesn’t know what they’re going to do after 10 years they could end up with a bad outcome,” he said.
“The other one gets back to what you have in the investment portfolio being geared against. If you have a well-balanced, diversified, quality investment portfolio then that’s better. If you have a highly speculative investment portfolio and you’re looking to gear it at 75 per cent then that wouldn’t be recommended,” Keary explained.
