It’s that time of the year when SMSF trustees need to address important duties, such as investment planning (to keep the fund members happy) and June 30 administration of the fund (to keep the ATO happy).
That second task might seem a matter for the fund’s technical advisers, but trustees should never forget that they, personally, are ultimately responsible to comply with all requirements. If you haven’t read material from the ATO about trustees’ responsibilities recently, it might be useful to re-discover what’s required.
The sole purpose
This might also remind trustees that their fund’s first and major obligation is to provide income for members’ retirement. If the fund is not yet in pension-paying mode, it might be useful for trustees to consider how the fund’s current rate of income compares with the legislated minimum payout when pensions are begun. A trap for SMSF trustees is to focus only on the size of the portfolio and neglect to relate this to outgoing pensions when retirement comes along.
For funds paying pensions, for the 2013-14 year, the ATO says a 65-year-old retiree has to receive 5% of the fund’s assets in a pension, rising progressively to a maximum payout of 14% for members over 95. A warning: these rates are above the 2012-13 levels following the phase-out of the discounted rates during the GFC.
In pension mode, an SMSF’s annual fund earnings ideally should be comfortably above 4% (the minimum payout for 55-64 year olds) if the fund is to be, in the current fashionable phrase, sustainable into the future. That might mean re-assessing assumptions on future living standards or investment strategy. That may also mean forgetting about part-owning a racehorse or holding lots of relatively illiquid, low yielding property.
Risk versus returns
SMSF trustees and members need to remember they have to cope with all the future risks – investments not performing, not enough capital to generate income, living beyond their savings, drawing down too much income, keeping pace with inflation and financing healthcare.
Trustees need to run their own risk assessments on their investment approach and asset allocation strategy – something professional trustees of major funds do as a matter of course. Too many local shares or too few overseas investments? Enough defensive investments (cash or bonds) to ride out a temporary stock market decline? Answering these questions also helps trustees assess their risk tolerance.
But perhaps the biggest risks for SMSFs are changes to the rules and regulations. While there were pre-election pledges not to fiddle with super (and we all know now how politicians regard these promises), the government will be forced to look more closely at tax concessions – though not necessarily in this term of government.
One obvious target is the 2006 decision to make capital gains and income tax-free in pension-paying funds. Clearly, any such changes would need to be prospective but any prudent, pension-paying funds might consider locking in some larger capital gains by selling and buying back the stocks now.
Then there is an SMSF’s ability to borrow to buy property assets – something that major super funds aren’t allowed to do. If this changed, the government might also have to consider limiting negative gearing benefits to close off tax-minimising alternatives.
Finally, the transition to retirement scheme – a legislated and much favoured lurk for higher income earners – might also come under scrutiny. As the pension age goes up to 70, the access age to retirement benefits would also be adjusted, lessening the attractions of re-contributing the income back into super. For those other than the rich, the age at which people can access their super is important; Ken Henry notes that one-third of all super savings are drawn down before people reach 65.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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