A landmark stage in the life of a self-managed super fund is when at least one of its members moves from the accumulation phase to retirement phase. (NB: A financial planner can help with this question if you're not sure)
SMSFs often have members in the accumulation and pension phases. And typical two-person funds have both members retiring within a short time of each other – if not at the same time. (Two-person funds make up 70 per cent of SMSFs.)
Of course, some members take a transition-to-retirement pension rather than move from full-time work to full-time employment in one step yet still may contribute to super.
The growing waves of baby boomers who are nearing retirement or in early retirement and the large percentages of greying SMSF members underlines the need for their trustees to consider how their funds should handle the retirement phase.
Tax office statistics show that 46 per cent of SMSF members are over 60. And well over a third of SMSFs pay superannuation pensions (including transition-to-retirement pensions) to at least some of their members.
The Superannuation market projections report 2016, published early this year by independent consultants Rice Warner estimates, that SMSFs hold 52.5 per cent of overall superannuation assets invested in retirement products (including transition-to-retirement pensions), as at June 2016. This compares to 32.1 per cent for commercial super funds and 6.1 per cent for industry funds.
Some of the issues that SMSF members should be thinking about in preparation for retirement include:
- Whether to gain additional specialist advice on preparing their funds for the members' retirement.
- The appropriateness of a fund's asset allocation for retirement, given such considerations as the need to pay member benefits while gaining an appropriate exposure to growth assets. A decision may be made to sell some assets to acquire others. If direct property transactions are anticipated, the process may take some time.
- Whether the fund's existing mandatory investment strategy will still be appropriate for the retirement phase.
- The need for pension-paying SMSFs to accurately calculate their tax-exempt pension income, whether to manage assets on a segregated (specifically allocating or segregating assets to supporting its pensions) or unsegregated basis, and to pay the annual minimum pensions required to retain concessional treatment.
- Estate planning. Quite simply, the retirement of members will no doubt prompt many SMSF trustees to focus on the need to plan for the management of their funds upon the death of a member.
Specialist superannuation editor Stuart Jones writes in the Thomson Reuters Australian Superannuation Handbook 2016-17 that beginning to pay a pension to members is a significant event for an SMSF that may warrant a revision of its mandatory investment strategy.
Under superannuation law, SMSF trustees are legally required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund.
These circumstances include investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and ability to pay member benefits. And trustees are required to consider the profile of their members, which would include their individual tolerance to risk.
Jones writes that a revised SMSF investment strategy for the pension phase may include the likely returns from the fund's pension assets, liquidity of pension assets, expected cash flow to pay the minimum pension, and the ability to member pensions and death benefits.
As Jones says, there are no specific rules for the investment of a fund's assets supporting a pension.
Is your SMSF retirement-ready? There's plenty to think about.
Head of Market Strategy and Communications at Vanguard.
25 July 2017