by Olivia Long

Understanding the life cycle of an SMSF will not only help you understand how they work, but assist you to consider your investment strategy at different phases of your life.

Establishment of the SMSF

The first stage is the establishment of the SMSF itself. This involves:

  • Deciding on the trustee structure (Individual vs Corporate)
  • Establish the fund trust deed
  • Admitting members to the fund
  • Complete statutory declarations
  • Determine investment strategy
  • Initiate rollovers/contributions

Accumulation Phase

The accumulation phase is predominantly focused on accruing wealth via contributions and achieving a desired return on investments, in line with a well formulated investment strategy.  There should be serious consideration given to life insurance, whether it is held inside or outside super, to ensure your loved ones are going to be looked after in the event of your death. 

Pension Phase   

A pension can be commenced by a member when they satisfy a “condition of release”, allowing them to access their superannuation.  This is normally based upon the member’s age (preservation age is currently 55) and most commonly occurs when a person retires.  In addition, this can also occur if you have reached age 60 and “have stopped a work arrangement” or if you have reached age 65, at which point you are eligible to commence a pension.

The key benefit of pension phase is the tax free status of all income and capital gains within the member account, with trustees often keen to access this benefit as soon as it’s available to them. 

A transition to retirement pension is another strategy used to build superannuation savings as a member nears retirement. This type of pension allows you to continue to work but gives you access to a portion of your superannuation benefits; between 4 and 10% of the member’s balance at the commencement of the pension (if pension commences part way through the year) or the balance on the 1st of July each year.

The focus of the trustee changes somewhat in pension phase as there is now a requirement to fund pension payments on top of the other outgoings of the fund, and cash flow must be managed to aid this.

Wind-Up of the SMSF

As they say, there are two things you can count on in life - death and taxes.

An SMSF wind-up commonly occurs following the death of a sole member. When a member dies their superannuation balance is paid out to their ‘nominated beneficiary’. If this is done by way of a lump sum cash payment there will be no other assets of the SMSF, and it will need to be wound up. The ATO is notified of this and they will cancel the TFN and ABN of the fund, and the trust structure will cease to exist.

Alternatively, where members have a ‘reversionary pension’ in place the money can remain within the SMSF and the structure does not need to be wound up. In this situation, pension payments will revert to the nominated member to continue for the future.

A reversionary pension is usually elected as part of an overall estate plan where the beneficiary does not need to access the entire superannuation benefit and there is a desire to preserve the investments within the SMSF.

What are the key rules for an SMSF?