The Experts

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Bryan Ashenden
Expert
+ About Bryan Ashenden

Bryan Ashenden is the Head of Financial Literacy & Advocacy at BT Financial Group, leading a team of professionals committed to supporting the adviser community with technical, regulatory, policy and research support.

Bryan has many years’ experience in leading and delivery comprehensive technical solutions to advisers and their clients, the last 16 spent with BT Financial Group.

With qualifications in Law, Commerce and Financial Planning, and being a SMSF Association Specialist Advisor, Bryan is a frequent presenter and facilitator at many industry events and regularly contributes to trade and consumer publications.

What changes with your SMSF as you move into retirement?

Monday, July 09, 2018

Retirement is a big decision. Your existing work/life pattern changes. Your income source, and often income level changes. You may actually have more time on your hands to do what you really want to do.  But if you have a self-managed super fund (SMSF), is there anything different that you need to think about?

Just like the decision around retirement, the decision to run an SMSF is a significant one and should not be viewed lightly. And as you decide to move into retirement, there are a number of important factors to consider.

The first question you should turn your mind to is whether maintaining and running your SMSF is something you want to do in retirement. As you should be aware, the proper and effective running of your SMSF does take time, and shouldn’t be considered lightly. Getting professional support can certainly make things easier, but doesn’t remove your responsibility.

If one of the reasons for your retirement is to pursue dreams beyond a working life, do you still want to spend time running an SMSF? Arguably you should have more time to do so, but if your dreams involve travel, you could find yourself with less time to devote to your SMSF.

If you do decide to continue with your SMSF, the next step is to ensure that it is “retirement ready”.  What do I mean by that?  You need to ensure that your SMSF can support your needs in retirement.  The most critical point here is to ensure that your SMSF Trust Deed allows for payments to be paid  to you in the form required (for example, a lump sum or pension payment), at the right time or frequency, and pays the right amount. 

This should be obvious, when you consider that the whole purpose behind super (and an SMSF) is to accumulate wealth to be drawn down in retirement. But if your SMSF has been around for a while, its Trust Deed could be quite rigid in terms of the types of income streams it can pay in retirement, and they may be more rigid (or less flexible) than is actually allowed under superannuation laws today. Similarly, the Deed might talk to types of income streams that are no longer permitted.

If you find yourself in this situation, it can be rectified by having the Trust Deed amended, but the processes required and the level of change required will differ from one SMSF to the next. So getting the right legal advice on the changes required and processes to do so is important. Even if no changes are required, having your SMSF’s Trust Deed reviewed to confirm no changes are required can at least give you some piece of mind.

You should also review your investment strategy to ensure it is appropriate for your future needs.  This doesn’t mean go and change all your investment to cash, term deposits and the like – things that are very capital stable so that you don’t need to worry as much about market fluctuations. 

Going too cautious with your investments reduces your ability to still benefit from capital growth that may be available, and it’s the potential for capital growth that could assist in making your money last longer. 

Similarly, think about what options you have to balance the need to draw an income, still have access to capital, and provide you with some potential longevity in your savings.  There isn’t a single easy solution to this, as many factors come into play. But it’s worth exploring what options you have.

Estate planning may become even more important for you in retirement. Let’s face it, retirement is usually associated with getting older, and getting older generally means the time we have left is getting shorter. Do you have the right estate plan in place – over your super and non-super savings?  What’s changed since you last looked at it? Do you have nominations in place for your super to prevent it becoming an estate asset, subject to your Will, and are those nominations current and to the right people?

Finally, it is really a case of coming back to the first consideration mentioned around the suitability of maintaining your SMSF in retirement. Still having one might be the right answer for you today, but at some point in the future (unless you have more members join), your super savings (and the overall balance of your SMSF) will start to diminish, and the relative costs of running it will likely increase.  Rather than waiting until it’s all too late, if you aren’t exiting now, you should think about what your future exit plan will be.

There is no reason why an SMSF can’t continue to play an active role in your retirement plans into the future. Just ensure you have considered what role you want that to be, and don’t be afraid to seek professional advice to guide you to the right decision.

 

 

 

These Budget changes could impact the future of your SMSF

Wednesday, June 06, 2018

 

If you have a self-managed super fund (SMSF) or are considering establishing one, there are some announcements in this year’s Federal Budget that you should be aware of, as they could have some impact on the future operation of SMSFs. 

At the outset though, it is important to remember that at this stage these proposals are only announcements.  Largely due to take effect from 1 July 2019, legislation will need to pass through the parliamentary process before changes take effect, and it is possible that the final version of the measures may differ to what has currently been announced.

So what are the changes and what sort of impact could they have?

Expanding SMSF membership

From 1 July 2019, it is proposed to expand the maximum number of members of a SMSF from the current level of four to a new maximum of six.

Whilst this change may have little impact on many existing superfunds, for those with larger family groups this could present a new opportunity to set up a single SMSF to cover all relevant members.  Or where the size of a family has required multiple SMSFs to have been established, it may be possible to merge them into one.

For some small business owners who have been considering the option of establishing an SMSF to own business premises, this expanded membership opportunity may allow greater flexibility in achieving these goals.  An example of where this could occur is in farming families, where an SMSF has been used to take ownership of the property, which is then leased back to the family to run.

With changes that took effect from 1 July 2017 that reduced the ability to contribute money into super once you had accumulated at least $1.6M, the ability to include new members may make the transfer of business real property something to consider once again.

Naturally though, introducing more members, and therefore more and new trustees, can bring added complexity to the operation of the SMSF, with more member accounts to be maintained, and could result in a different level of fees applying.  It will also be important to ensure that there are clear guidelines for all trustees about the decision making process, as more trustees could lead to more differences in opinion on how the SMSF should operate.

Whether or not you plan to expand membership of an existing SMSF, it is also a good reminder of the need to carefully consider the trustee structure you have in place for the SMSF.  Whilst many SMSFs have been set up with individual trustees, which is generally an easier and more cost effective choice for initial establishment, the on-going operation of a SMSF is generally better with a corporate trustee structure.  Not only does a corporate trustee structure provide greater administrative ease in the appointment of new directors (as new members joining the SMSF), but aids in providing a clearer ownership of assets – making it easier to identify what is owned on behalf of the SMSF and what is owned personally.  Clear separation of assets has historically been a focus area of the ATO.

Reduced audit requirements

The Government has announced it intends to amend the law so that SMSFs with a good compliance history will only need to be audited once every three years, instead of the current annual requirement.  Current indications are that you are deemed to have a good compliance history if you have three consecutive years of a clear audit result for your SMSF and your SMSF’s tax returns have been lodged on time.

Due to commence from 1 July 2019, this has the potential to reduce some of the on-going running costs for SMSFs.  However, the removal of this annual audit requirement does not mean you can relax when it comes to operating your SMSF.  In fact, it may be even more important to ensure your SMSF is professionally managed on an on-going basis to retain that strong compliance history into the future.  In the unlikely event that an issue was identified in a future audit, there is the risk that the penalties that could be imposed back to the time of the error could become significant.

Other super measures

In addition to the above measures that were specifically directed at SMSFs, you should also be aware of other proposed changes to superannuation from 1 July 2019 that may have a direct or indirect impact on SMSFs also.  These include:

  • A proposed ban on exit fees when rolling out of a superannuation, which combined with previous announcements to extend streamlined measures for rolling over super to SMSFs will make it easier to combine multiple accounts into one.
  • Members aged 65-74 won’t have to satisfy the existing work test (of 40 hours of employment within a 30 day period) in the first year they do not meet the work test requirements, if they have less than $300,000 in super and are seeking to make a contribution.
  • The introduction of a new retirement covenant for superfunds.  SMSFs have not (at this point) been specifically excluded from this measure which requires trustees to develop a retirement income strategy and consider the retirement income needs of members.

It’s important to remember that these measures are only announcements, they are not yet law - although consultation on some of these measures has commenced. To understand what impact these announcements could have on you and your SMSF, and to start thinking about your future options, it’s best to discuss your situation with a professional adviser. 

Note: This is a sponsored article.

Bryan Ashenden is head of technical literacy and advocacy at BT Financial Group.

Information current as at June 2018. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.  Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.

 

 

Protecting your SMSF savings in the event of a divorce

Thursday, May 17, 2018

 

Whilst it is said that around 50% of marriages end in divorce, the actual number is around 1 in 3.  Of course, just because the real number is less than perception, this is nothing to be applauded.  The real statistic, perhaps, is the obvious fact that 100% of divorces start with a marriage.

The prospect of a divorce is not something that most people getting married would be contemplating, but for those entering second or subsequent marriages, protecting assets and wealth built up in the past may be a higher consideration.  The same considerations should apply for those entering de-facto relationships as well.

When it comes to your super, and if you are in a self-managed super fund (SMSF), things can become more complicated.  There are considerations not only about what happens to your super, but also your ongoing membership of the SMSF.

Dealing with your super

Superannuation savings (whether in accumulation or pension) have been regarded as “property” for divorce purposes since late 2002.  This means that not only can they be taken into account when valuing combined assets for determining a split upon divorce, but the savings themselves can also be split.

Now, how the split actually occurs may be determined through Family Court proceedings, or could be by agreement between the members of the couple.  And obviously it’s possible that you could be on either side of the equation – the one losing some of their super, or the one gaining.  So what’s important to know?

Firstly, the amount to be split could be a percentage or an agreed figure, and the split could take effect now, or the split could be flagged to take effect at a future point in time.  Flagging may be more likely to occur where the superannuation interest can’t be easily split now, or can’t be valued until some future point in time.  A defined benefit pension, which is really only valued when it commences is a good example of where a flag may be used.

Secondly, you can’t choose the components of what is split.  For example, if a person’s super comprises $300,000 tax free components and $200,000 taxable components (a 60:40 split), and it is determined that $200,000 will be transferred to a receiving spouse, the $200,000 will be comprised of $120,000 tax free and $80,000 taxable components – retaining the 60:40 ratio.  You can’t choose to split / receive all of the tax free or all of the taxable components.

In addition, the split occurs in proportion to the preservation status.  Using the example above, if the splitting member had access to all their super (for example being age 65 or older), but the receiving spouse wasn’t yet able to access their own super, when the receiving spouse received the $200,000 they will have access to it, even though it may have remained within the super system.

The SMSF specifics

Life can be a bit more complicated with an SMSF.  Whilst your super in an SMSF is dealt with under the same rules outlined above (that apply in other superannuation environments), when it comes to an SMSF, you need to remember that your responsibilities extend beyond just your own account balance.

As a member of an SMSF, you are also a trustee.  This means you have ongoing obligations as a trustee and you need to decide if you want to remain in that fund, open a new SMSF, or move to a different super fund.

The answer for this differs for each person, as it can be affected by how amicable (or not) the split is with your former partner, and possibly by the underlying assets.  For example, even though you are getting divorced, you could still be on good terms with the other fund members / trustees and therefore happy to remain in the fund.  There may also be certain assets in the fund that would need to be sold if you were trying to leave the SMSF and move to another fund, but you could have a view that now is not the right time to liquidate them.

And if there are other members, such as children, involved – which fund should they be in?

Divorce can be difficult at the best of times, and can become more complicated when it comes to the impact on your super.  If so inclined, you can put in place a superannuation agreement up-front (before marriage) that details how your super will be split in the event of a future relationship breakdown.  Most importantly though, it’s important to get the right advice – legal and financial – if you are going through a relationship breakdown to ensure your financial affairs are being well managed. 

Note: Sponsored article by BT Financial Group

Bryan Ashenden is head of technical literacy and advocacy at BT Financial Group.

Information current as at April 2018. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.  Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.

 

 

Should your SMSF have a managed account?

Wednesday, February 14, 2018

Acronyms and naming conventions in the investment industry can be confusing for even the most astute investors and SMSF trustees. Many investors are unaware of the difference between direct investing (usually into equities) or investing into a managed fund, where you have an investment expert managing a portfolio of investments for you and others.

Today, the use of managed accounts as an investment option is increasing, and these are then broken down into different types (and acronyms), such as separately managed accounts (SMAs) and individually managed accounts (IMAs). So, what is a managed account, and should you consider one for your SMSF investments?

MANAGED ACCOUNTS

In very simple terms, a managed account is like a managed fund, but without the “trust” structure that managed funds have.  There is the benefit of an expert manager looking after a person’s portfolio and choosing particular investments at a point in time based on their experience and analysis of market opportunities.

While an investor will purchase units in a managed fund, in a managed account an investor will buy into the underlying investments.  This means the investor (an individual or an SMSF) retains ownership (for tax purposes) of the underlying investments, their tax position (for capital gains tax (CGT) calculations) is based on their circumstances (such as how long have they been invested) for CGT discounting purposes, and dividends and associated franking credits flow through to the investor.

THE BENEFITS

This can provide two significant benefits to an investor.  The first is around CGT calculations.  Depending on when you invest in a managed fund, and market movements, some investors have been caught out by a fund manager appropriately distributing income to unit-holders that contain a capital gain distribution for events during a particular year, but the investment into the managed fund itself may have fallen in value during the year due to market movements. 

It can give an anomalous result in that as an investor you are taxed on gains, whilst your investment has suffered a loss.  It is an unfortunate outcome that you have no real ability to control, as it has happened purely based on circumstances rather than anyone’s fault.  With a managed account, this risk is removed as you have greater transparency over outcomes.

Second, without the overlying trust structure of a managed fund, when distributions (such as dividends) are paid from an underlying investment, they will flow though to you as the investor, rather than accumulating with the fund manager until such time as they choose to distribute any earnings.

SMSF STRATEGY

In an SMSF environment, managed accounts can be beneficial because of this ownership structure and flexibility it provides.  It could, if appropriate, allow you to segregate some of the underlying investments between different members, or between investments held in accumulation or pension phase. 

Of course, you can keep it all much simpler (as many SMSFs do) and just have the managed account investment pooled with all your other investments and allocated on a proportional basis.

As always though, it pays to spend some time doing a bit of research before looking to utilise a managed account strategy within your SMSF.  Different providers will charge different fees - some may be more, and some may be less than the equivalent type of managed fund investment. 

There may also be differences in the initial amounts you need to have available to invest.  Whilst the level of initial investment has come down dramatically from many years ago, it is still typically higher than that required to invest in a managed fund.  And of course, if you are investing via your SMSF, you need to ensure that the investment aligns with your SMSF’s documented investment strategy.

With some careful consideration and planning, along with assistance from your professional adviser, you could find that using a managed account strategy as part of your investment portfolio makes a big difference to your future outcomes.

Bryan Ashenden is head of technical literacy and advocacy at BT Financial Group.

[Sponsored]

 

Should you diversify your SMSF?

Wednesday, February 07, 2018

In investment terms, “diversification” means allocating your savings in a way that reduces your exposure to any one particular asset, asset class or risk. In turn, diversification can lead to a reduction in the overall level of risk or volatility associated with your investment portfolio.

Of course, the old adage about investments also rings true in that you cannot and should not use past performance as an indicator of future performance. Which means that if you diversify, it doesn’t guarantee that you won’t have volatility and doesn’t mean you are completely protected from market risks.

DIVERSIFYING THE SMSF

When it comes to an SMSF, the first thing you should be aware of is that it’s a requirement under superannuation law that you must formulate an investment strategy for your SMSF. In doing this, the law also requires you take into account diversification of the SMSF’s investments. 

Best practice would be to ensure that your SMSF’s trustee minutes clearly document any reasons as to the diversification approach taken.

The expression “don’t have all your eggs in the one basket” is the basis of diversification. To use an example, imagine if your SMSF had a direct property investment (e.g. a rental property) – depending on the total invested in your SMSF, a property could constitute a significant proportion of your portfolio.

While that property might be a valid investment, at one point in time you’d have to consider what  impact a downturn in the property market could mean for you and what would happen if you had to sell one asset at the wrong time in order to meet liquidity needs.

Of course, this single asset scenario is not the norm for most SMSFs. But it highlights the importance of diversification.

WAYS TO APPROACH DIVERSIFICATION

One view is to strike the appropriate balance between growth and income based investments. Your growth assets might be shares and managed funds, whilst your income based investments may be simple cash accounts, term deposits, or certain managed funds that pay regular income distributions, but offer little in the way of capital growth. 

This allocation, whilst a form of diversification, is really about your attitude to risk, and how much market volatility you are prepared to accept for the expectation of future returns (usually in the form of capital growth).

ASSET CLASSES

A second approach is to take it to the next level and look at asset classes. This can involve an allocation of investments across different investment types. Typically, these might comprise cash, fixed interest, property, shares and alternative (which could be anything that doesn’t neatly fit into one of the others).

You may also consider diversification within each of these asset classes. For example, diversification within the asset class of shares can be between Australian and International Shares, and could be between different segments of the market, such as financial, mining, retail, pharmaceutical and other stocks.

NO-ONE KNOWS THE FUTURE

No-one, not even the experts, can accurately predict when the high and low points will be. But if you’ve invested across, say, a range of different assets classes – from cash through to shares - you may not need to, because those asset classes don’t always move in the same direction at the same time.

So, when one asset is rising in value, another may be falling. Diversifying across different investments helps you to smooth out overall returns. You may miss out on some ‘upside’ if you’re not fully invested in the best performing asset class, but this can be compensated for by avoiding the potential impact of having all your funds in an asset experiencing a significant downturn.

Ultimately though, it comes down to the approach you want to take. As a concept, diversification sounds relatively simple and straight forward. But choosing which markets at the right time, and in the best way, can be challenging. Like with all SMSF matters, you don’t have to do it alone.  

You should consider seeking assistance from a professional adviser who understands not only investment markets, but also takes time to understand you, your SMSF and your goals. After all, success can really only be measured by how the choices you make impact on attaining your desired outcome.

Bryan Ashenden is head of technical literacy and advocacy at BT Financial Group.
Information current as at January 2018. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.  Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.

 

Managing cash in your SMSF

Monday, December 18, 2017

By Bryan Ashenden 

The cornerstone to any successfully operating self-managed super fund (SMSF) is its bank or cash account. After all, it’s the first thing that will be opened whenever an SMSF is established.  

Whilst there is the ability to transfer ownership of some assets from outside the super environment to your own SMSF, most transactions will flow through a cash account. If you think about it, so much of your SMSF operates though the cash account.

There will be contributions made to your SMSF by members or employers (such as super guarantee or salary sacrificed amounts), there will be returns from investments such as dividends, there will be amounts paid to purchase investments, amounts paid as benefits to members in retirement, and the costs for running the fund, including insurances, administration and taxation.

So what’s the best way to manage cash in your SMSF? Part of this comes to a question of how much cash you need for operating purposes (i.e., to meet regular expenses) and how much is for investment purposes.  

Remember that cash can be an appropriate investment for your fund, particular where it is known that it will be needed for a particular purpose in the near term, or the members themselves are concerned about market volatility and looking for a capital stable investment.

In these instances, you could be considering a range of options, from an ordinary cash account (with the highest possible interest rate you can find), a term deposit (which may offer a higher interest rate than a cash account, but locks your money away for a period of time), or even some other forms of fixed interest investments such as managed funds. 

How do you choose the cash account and how to operate it for your fund? There is a range of choices available, with some accounts having been developed specifically for the SMSF environment.  There is a number of considerations you could take into account for your SMSF’s bank account. These include:

What rate of interest is payable on the account?  

In an environment of low interest rates, many transaction accounts currently pay little in interest (depending on the amount held in the account). This may not be a concern if the balance you are looking to maintain in this account is comparatively low where it is used for transactional purposes.

What fees are payable?  

Like any investment, consider the fees that may be payable and compare that to the level of return you are generating. Is there also a minimum or maximum number of transactions required that impact the level of fees?

What features does the account come with?  

Remembering that as super funds are generally not allowed to borrow, you may need to carefully consider whether to attach any credit card or overdraft facility to the account.  

Another thing you could consider is the possibility of having two cash accounts, if that better suits your needs or circumstances.  Having two cash accounts can mean that one is used for the everyday transactions of the SMSF, and another that holds the majority of the cash to be kept aside for working needs. This second account could be in a different form, such as online account, which could pay a higher rate of interest. You then have the option of moving money between the two accounts as needed.

One final item to always be conscious of is to ensure that the bank accounts of the SMSF are always maintained separately to your own personal account(s).

The Australian Taxation Office (ATO), as the regulator of SMSFs, has a strong focus on the separation of assets of SMSF members and trustees from personal accounts. There are some simple steps you can consider around this, such as whether it is worth setting up your SMSF accounts with a financial institution that is different to where you bank personally.

If there is some form of keycard associated with your SMSF accounts, you can consider ways to reduce chances of being accidentally used if you tend to carry it around in your wallet. Or if there is a cheque book for the SMSF, you can consider separating it from your personal cheque book.

The real key to managing cash within your SMSF comes back to taking your time. Be clear on what it is you are trying to achieve. Understand the type of account you need for specific purposes. And do your research. With so many options to choose from, don’t be afraid to ask for professional help to ensure your SMSF gets it right and sets you up for safe operating future around your retirement savings.

Bryan Ashenden is head of technical literacy and advocacy at BT Financial Group.

[This is a sponsored article from BT].

 

 

What makes a good SMSF investment strategy?

Monday, November 06, 2017

By Bryan Ashenden

If you have a self-managed super fund (SMSF), then you should be aware one of the obligations that is placed on you as a trustee is that you must have an investment strategy for the fund that is reviewed regularly. But what makes a good investment strategy? How long does it need to be? How detailed?

These are all great questions, but unfortunately there is no single right answer. However, here are 5 considerations that can help you along the way.

1. Diversification

Super law does require that when formulating an investment strategy, trustees must have regard to diversification. Diversification relates to a consideration about the spread of different investments you might have – or thinking about ensuring you don’t end up with all your eggs in one basket.

However, there isn’t a requirement that an SMSF’s investments must be diversified, and there are some SMSFs that have large investments in a single asset (or asset class). Most commonly this occurs where the SMSF has a direct property investment, with a comparatively smaller investment in cash in order to make any relevant payments as necessary.

The big risk being so concentrated with your investments into one asset or one segment of the market is what if something went wrong? What if a property bubble bursts?

2. Risk and return

The risk involved with, and the likely return from, the investments are also important considerations, and really ties back into the issue of diversification of investment.

What can sound like an exciting possible return on any particular investment, should always be balanced against a consideration of any risks involved with that investment. The difficulty is that both risk and return are assessments of what may happen in the future. It’s important to remember that any historical performance data availably is purely that – i.e. history! It can provide some guidance as to how well a portfolio manager has looked after the monies under their control, thereby providing some insight into their level of governance, but you should always be cautious when it comes to relying on performance history.

You shouldn’t look at any investment in isolation, and always compare their performance against peers and over multiple periods of time. For example, whilst a share fund that provided an 8% return in the last 12 months might sound relatively good, it’s not if all other comparable share funds were returning in excess of 10%.

In addition to pure investment risk, you need to consider how much risk the members of the SMSF are willing to take on. The answer may be different for each member of the fund, so you also need to think about whether each member has their own investment portfolio in the fund, or whether everything is pooled together.

3. Liquidity

As a trustee, you need to ensure that your SMSF is able to pay its liabilities as and when they fall due. Doing this for the ongoing running costs of your fund, sounds relatively easy. But you can’t forget about the additional liquidity required as members of the fund approach retirement and start to draw on a pension from the fund.

4. Insurance

Trustees are also required to consider the insurance needs of members. This doesn’t mean that the fund has to hold insurance for the members, but this is actually an important consideration. Given that the trustees of an SMSF are also the members, this is about considering whether you have enough insurance of your own, and if not, should you acquire more coverage through your super.

But don’t constrain yourself to personal insurance considerations, even though that’s all that’s technically required. Depending on the type of investments in your SMSF, you should also consider if you need the fund to take out other types of insurance. This could be a vitally important consideration if you hold property.

5. Documenting it all

Ensure you document your plans. The actual investment strategy document can be long or short, but you need to show you have considered the above elements. Most good investment strategies will have two key positions within them.

  1. An overall goal that the investments of the fund are trying to deliver. For example, the fund could be targeting an overall return 2% above the Consumer Price Index on a five-year rolling basis.
  2. Second, its sets out acceptable investment parameters. For example, it may say the fund is happy to hold between 30% and 60% of its investments in Australian shares, but is targeting a holding of 45%.

These elements taken together give the trustees something to measure performance against. If the SMSF isn’t meeting these objectives, or its investments fall outside of the expressed permitted range, then the trustees need to be doing something to bring it back in line.

Overall, a good investment strategy is one that aligns to the future goals of the members and what they are trying to achieve, and ensures this is done with appropriate consideration of the risks in achieving these goals.

The good news is that as a trustee of a SMSF, you don’t have to do it all yourself. Professional support can help you understand how your fund has performed in the past and is currently performing, and also help you to identify the requirements of members and select investment to give them a chance of future success.

 

Time to review your SMSF strategy

Thursday, September 21, 2017

 

Use your SMSF to teach your kids about finance

Friday, August 18, 2017

By Bryan Ashenden

With self-managed super funds (SMSFs) permitted to have up to four members, it may be a surprise to learn that approximately 70% of SMSFs have only two members and around 23% have just one.  Which means that only 7% of funds have three or four members.

If you consider that most of the two-member SMSFs are likely to be “mum and dad” funds, and single-member funds often arrive when one of the original two members pass away, it begs the question – “where have all the children gone?”

While it is always an important personal decision to set up and start your own SMSF, and an important decision as to who else you want to be in the same SMSF with, there are a couple of important elements you could consider in deciding whether to have your kids join your fund.  Most of these would apply to your children who are at least 18 years old, but there can be some aspects that are important for younger kids as well.

1. Teach your kids about finances and managing money

The first is the opportunity to teach your children more about finances and the importance of managing your money. One of the reasons you’re likely to be in a SMSF is because you want control, and with control comes responsibility. In fact, one of the most important facets of being in an SMSF and being a trustee of your own fund is that you are ultimately responsible for the operation of the fund. As much as you can, and probably should, outsource certain aspects to professional SMSF advisers, ultimately the decisions rest with you.

Having your children involved in managing their finances and being responsible for the decisions they make (both legally as well as personally) is a great way to make them more accountable for their saving and investment decisions. And if they can do that in the safety of an SMSF environment where they have you as co-trustees, hopefully the disciplines can also spread to their other financial decisions outside of the SMSF environment.

While having children under the age of 18 as members of the SMSF is permissible, they can’t be a trustee and usually the parents will assume this responsibility for them until they are of legal age.  However, it doesn’t mean you can’t start to include them as part of the process so they learn.

2. Consider the costs

The second aspect to consider is around cost. For many younger people, superannuation isn’t a huge consideration as they don’t have much of it. Generally their employer sends the compulsory super guarantee off somewhere, often to a default fund, and in most cases, the member hasn’t really chosen how to invest their super or understand what costs are involved. It’s an issue for later in life.  The issue is, in a low-return environment, the costs of their current super environment could actually work against them as it means they could have less super working for them. And over the long term, that could make a difference.

But if they join your SMSF, is there the possibility that their costs will fall? While studies have shown that you may need somewhere between $200,000 and $500,000 in an SMSF to make it economically viable compared to a non-SMSF environment, don’t forget this is for the total amount across all members, rather than per member. If you are already paying a set fee for the administration of your SMSF, will there be much of a change by adding a new member?

3. Opportunity for diversification

Third comes the opportunity for diversification. Members with low balances are often forced to use a default investment arrangement and share risk and return with thousands of other members, simply because they don’t have enough to build their own personalised investment portfolio. In an SMSF, while they may not have enough for their own portfolio to begin with, there may be a greater level of control and understanding by pooling their super with yours to create a bespoke investment portfolio.

4. Estate planning

The last aspect to consider is around estate planning. If your children are of an age where you have appointed them as executor to your will, when you pass away your children will have the ability to step in (as your legal representative) to administer the distribution of you super savings held through the SMSF. To help reduce the burden this can place on your loved ones at that time, introducing your children earlier to your SMSF can make a significant difference as they will have a better understanding of where your super is, who you want it dealt to, how the fund operates and other decisions that need to be made.

Running an SMSF is not easy, but neither is gaining an understanding of finance and the decisions that need to be made at different stages in life. If using your SMSF and the guidance of your professional adviser is an option to get your kids’ financial future on track, isn’t it something worth considering?

First published in the AFR.

This is a sponsored article by BT Financial Group.

Information current as at June 2017. 

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regards to these factors before acting on it.  This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. Information in this blog that has been provided by third parties has not been independently verified and BT Financial Group is not in any way responsible for such information.

BT Financial Group - A Division of Westpac Banking Corporation.

 

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