How well do you know your SMSF?

As experienced financial planners, ITL Financial Planning’s Nick Lloyd and Shereen Churchill meet a lot of self-funded retirees. Many of them choose to set up a self-managed super fund (SMSF). But after going it alone for a few years, many discover that, despite being sophisticated investors, they could use some expert direction on how to make the most of their SMSF to build their wealth and secure their income in retirement.

People such as:

  • The couple who has spent years concentrating on raising their children and building a successful family business, who haven’t given much thought to super.
  • The entrepreneur fast approaching retirement following the sale of his business, who realises that while he might know lots about his industry, he knows less about how to choosing an appropriate investment strategy for retirement.
  • The widow who, now her husband is not around to consult about investment decisions, wants to ensure she can provide for her grandchildren’s education without unnecessary tax or red tape weakening her legacy.

The appeal of having your own SMSF

Self-managed super funds are extremely popular investment vehicles for Australian retirees. At the end of June 2017 there were almost 600,000 SMSFs with an average balance of $1.17 million, according to the latest statistics released by the Australian Taxation Office, which regulates SMSFs. The trustees of SMSFs are responsible for almost 30% of all money invested by Australian super funds (approximately $696.7 billion of the $2.3 trillion market).

‘There are many advantages to using SMSFs,’ Nick explains. ‘At ITL Financial Planning we like to use SMSFs because there is more control and often there are cost benefits. For example, you can save money by amalgamating a husband and wife’s super into an SMSF.’

While people naturally want the sense of control that comes with managing their own money,  the realities of cost and administering an SMSF can become a burden. As Shereen says:

‘We get the need for people to control their own money. Some people we see have been bitten through the poor performance of a managed fund they’ve held in the past, or they decide to roll over money from an industry super fund into an SMSF.

But then they’re time-poor and maybe they see their accountant once a year … they’re not maximising their financial position and they don’t necessarily understand the duties and requirements of being the trustees of the fund. They set and forget but the rules keep changing.’

How well do you understand your SMSF strategy and trustee obligations?

There are challenges to running your own show with an SMSF. Take a look at the following questions to see how many you can answer.

  • What is your SMSF investment strategy? According to current laws, how formal must your plan be, and how regularly must you review it?
  • What criteria do you use to decide where to invest your money, in which asset classes – and for how long should you keep each investment?
  • Are you maximising your pension strategy?
  • Are you up to date with all the latest changes to the rules governing super?
  • Are your death benefit nominations set up to ensure the transfer of your wealth accords with your wishes?
  • Do you have a plan to maximise your contributions?
  • Is your SMSF compliant with the latest legislative changes to tax and super?

Common challenges for self-funded retirees with an SMSF

Investment strategy

Current laws demand SMSF trustees have an investment strategy that’s reviewed regularly (we think at least every year) to ensure compliance as well as changing needs.

Estate planning

‘We often see a weakness with how a person’s super ties in with their estate planning,’ Nick Lloyd says. ‘What you hold in super does not automatically form part of your estate, so you have to set up death benefit nominations and do them properly so money is passed on to the right people and in the most tax-effective way.’

Contribution strategies

For other people, their super contribution strategies need attention in light of new rules that came into effect in July 2017.

‘Some people are not utilising the concessional and non-concessional contribution caps,’ Nick explains. ‘These days you need to have a longer-term plan because you can’t put as much into super in the last few years before you retire as you used to.’

Pension strategy

If you’re in the pension phase, drawing down on your investments, it’s crucial to know what the minimum and maximum pension rules are for withdrawal amounts and if you’re eligble for tax free earnings on your pension.

Insurance

Since 2012 it is compulsory for SMSF trustees to consider the insurance needs of members as part of their investment strategy.

The ITL Financial Planning annual client review process

Nick and Shereen like to think of themselves as personal trainers coaching their clients to peak financial fitness. Their annual client review process helps them assess a client’s current level of financial fitness, and to offer expert strategies to help the client meet or exceed his or her goals.

‘At the client review we always discuss investment strategy,’ Shereen says. ‘What is happening or will happen in the client’s life that may affect how much income they need from their investments in the year ahead? How must the investment plan be adjusted to cope with a capital expenditure or a market downturn?

‘We also talk about things like their spending plans, review their insurance, aged care plans, and the legacy a client wants to leave for their children and grandchildren.’

Just as an SMSF performs best when it receives regular attention and review from its trustees and expert advisers, so will a client’s relationship with his or her financial planner benefit from taking the long view.

‘We want clients to see value from our advice and services over the long term,’ says Shereen. ‘We’re not about set-and-forget.’

Get to know your SMSF, and work with a financial planner to determine how it can best work for your unique circumstances.