Life’s unpredictable – and there’ll be occasions which place an SMSF’s future in doubt. It may be a change of government policies, the divorce of a member, or death, or incapacity, or bankruptcy. Or it could be the loss of willingness and commitment. Or simply that the fund has run out of money.
Whatever the case, it’s important to take a considered approach. As I’ll show in the following case studies, sometimes it’s best to keep the fund going, and other times it makes sense to shut up shop and re-deploy the money.
Case study 1 – Adrian and Bella
Adrian and Bella are both in their seventies and have had an SMSF for many years. Their combined balance is around the $1m mark, which provides them with pensions. The minimum pension taken each year must be at least 5% of the opening pension balance. However, they are nearing the time when they feel their pension account balances will decline faster than the income the fund earns on its investments. Fund earnings are around 7% p.a., with 4% paid as dividend income and 3% as capital gains. The fund’s investment strategy is simple, with 2-3 years of pension payments held in cash and the remainder in Australian shares. The administration costs of the fund are very low, which Adrian and Bella don’t see as an issue.
Case study 2 – David and Bianca
David is 72 and retired. His partner Bianca is 59, works full time on a modest salary and has plans to retire soon. To make use of their SMSF most effectively, David has been drawing down a tax-free pension to top up their living expenses. David’s balance in the SMSF is now about $4,700 and Bianca’s balance is about $154,000. Fund earnings are around 7% p.a., with 4% as income and 3% as capital gains. The investment strategy is simple, consisting of cash and Australian shares. Administration costs in dollar terms are similar to Adrian and Bella – but are higher as a percentage of the fund’s total value.
What should our couples do?
For each couple, is the right decision to keep the fund going? Or close the fund and invest the money elsewhere? Well, it really just depends.
But before we consider each of the couples, let’s examine the features of investing inside and outside of super.
Revisiting Adrian and Bella
If Adrian and Bella keep their SMSF, all fund income and capital gains are tax-free. Any amounts that are withdrawn from the fund as pensions would also be tax free to them.
In contrast, if they withdrew their money and invested it outside of super on the same terms, it’s reasonable to expect the income would be tax-free due to some of the tax offsets that may be available to them. However, if they sold some of the investments and made taxable capital gains, they may find that they could be up for some tax as they could exceed their tax-free threshold. Their tax position would also depend on other income they may be currently earning.
It seems wiser for Adrian and Bella to retain their fund. Being in retirement phase, fund income, CGT and fund withdrawals are tax free. However, they should review their position periodically to decide whether it’s worthwhile to withdraw their fund balance and invest it personally. This may come at the time when they qualify for social security benefits – but the decision would be guided by other assets and income they have in addition to their SMSF.
Revisiting David and Bianca
David and Bianca are currently in a less flexible place with their SMSF. Without retiring, Bianca is not able to withdraw her super as a lump sum and invest it in her name or jointly with David. If she was to ‘retire’ as defined for a person under age 60, she may be able to access the money.
If David and Bianca wished to retain the SMSF, Bianca could access her superannuation as a transition to retirement income stream (TRIS). Tax would payable on the taxable component of the TRIS until age 60.
The alternative could be to wind up the SMSF and rollover the amounts to another superannuation fund. Whether this is worthwhile could depend on the fees and charges and how long it is before Bianca retires.
Other relevant factors in retaining their SMSF: do David and Bianca have other super money they could rollover to their SMSF? And for how long does Bianca intend to make super contributions?
So – what should each couple do?
In both cases, there are external factors relevant in deciding the fate of the fund.
However, for Adrian and Bella, it would seem that retaining the fund is the better option for the time being, though this would need to be reviewed periodically.
As for David and Bianca, it seems best to wind up the SMSF and rollover Bianca’s benefit to a lower-fee super fund until she retires. Or otherwise: delay winding up the SMSF until she has reached 60 and retired.
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 regard to your circumstances.