At the start of an election campaign and just over a month into the financial year, it’s a good time for SMSF trustees to run a precautionary checklist. While it’s always a good time to look at investment strategy, this is probably also a time to examine administrative and governance matters. Here are three main checkpoints.
1) Government policy
On the plus side, both the opposition and, subsequently, the government, have pledged no changes to superannuation – although the statements were hedged. The opposition earlier pledged “no detrimental changes” while in late July the government promised “no major changes to superannuation tax policy” for five years.
So far, so good, but past history suggests political pledges should be taken with a grain of salt. Although largely irrelevant to SMSFs, Treasurer Chris Bowen did increase the size of inactive superannuation balances that will be transferred to the ATO, two days after the above statement.
The recent furore on changes to the FBT regime on cars is also a reminder that government decisions on administration can be just as important as alterations to the law or regulations. For instance, the change in the rule that allows SMSFs to borrow to buy property, was simply the result of a change to the ATO’s rulings, which, theoretically, could be changed again.
Although the available statistics don’t suggest SMSF property investment is yet at worrying levels, there’s anecdotal evidence property spruikers are using the hard sell on inappropriate assets. There’s always going to be a worry with the sheer size of SMSF super assets, which represent more than a third of the $1.5 trillion of retirement savings.
2) Investments
SMSF members’ main task is to manage their retirement savings prudently, remembering their responsibilities as trustees. This means not only having a sound investment policy to build wealth, but also sound governance of the fund to avoid breaching the rules of the regulator, the ATO.
Trustees need a realistic view of their own abilities to assess and manage a wide range of potential investment assets. Too many amateur investors (especially men) can be over-confident – a sure recipe for losses in risky areas like trading foreign currencies, options, or contracts for difference.
3) Governance
Trustees also need to consider their formal investment strategy, which documents the percentages in various asset classes. The asset allocation is an important part of the whole investment approach, rather than just another annoying item on a checklist. (This year they also have been asked to consider whether to take out insurance on members.)
The asset mix becomes vital as an SMSF approaches or enters the pension-paying phase – especially if the portfolio has “lumpy” and illiquid property assets. Funds paying pensions also need to go back to their asset allocation models if they want their fund’s income to be sufficient to pay the minimum pension (rather than having to sell assets).
Speaking of that, in the 2013-14 financial year, minimum pension payouts have reverted to their original levels. During the global financial crisis, the government lowered required payouts by as much as half, so funds didn’t have to pay out more than they earned. The change back, luckily, has coincided with much higher investment returns – so far at least – which will help pension-paying SMSFs adapt to the new, higher minimum pensions by June 30 next year.
But the record low interest rates underline the importance of asset allocation: piling into bank term deposits is much less attractive at rates of less than 4% when the lowest minimum rates of pension payout have been increased.
Members under 65 in 2013-14 have to receive at least 4% of their account balance in pensions. For those 65 to 74, it’s 5%; 75 to 79 year olds must get 6%, rising to 7% for 80 to 84 year olds and a daunting 9% for those 85 to 89 years old.
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.
Also in the Switzer Super Report:
- Thomas Rice: Why we love small-cap data company NEXTDC [1]
- Ron Bewley: Staples offer security and Goodman Fielder the best bet [2]
- Penny Pryor: Buy, Sell, Hold – what the brokers say [3]
- Tony Negline: Why the tax on pension income will never happen [4]
- Grant Abbott: What happens to your SMSF when you die? [5]
- Questions of the Week: REITs and high conviction funds [6]