If taking full control over your superannuation and retirement plans is important to you then a self-managed superannuation fund gives you the flexibility to manage your retirement savings the way you want.
Read our insights on the latest news, trends and changes related to SMSF advice.
In somewhat surprising (but welcomed) news, a weekend media release from the Government has announced that the 50% reduction in pension minimums are to be extended for the 2021/2022 financial year.
These measures were initially adopted for the 2019/20 & 2020/2021 financial years due to the impact of Covid. In the release it was noted that this measure “…continues to make life easier for our retirees by giving them more flexibility and choice in their retirement.”
Is this necessary when investment markets have recovered? I’m not convinced, but happy to provide advice on the opportunities it presents to you.
Important: Remember that the reduced minimums are an option and not a mandatory reduction to your payments. You have the choice to reduce or retain pension payments, providing they meet or are above the reduced minimum.
For our clients on an ongoing service package, we will be in touch to discuss your options in the new financial year. If you want to have a chat sooner to understand your options then please get in touch, or book a chat with your adviser at our online booking page.
How do you work out your reduced minimum annual payment?
Use the percentage factors in the table below to calculate your minimum annual payment amount, using your age at 1 July of the financial year (or at the date your income account commenced, if later).
SMSFs are not for everyone, but for those individuals where an SMSF is entirely appropriate for them, the benefits can be considerable.
In the context of ongoing public debate regarding the appropriate minimum size for an SMSF, new research has been provided to provide insights into the true costs of running an SMSF. And the research shows SMSFs are cheaper to run than many people may think.
The findings allow SMSF trustees and potential SMSF trustees to compare appropriate estimates of fees for differing SMSF balances with institutional superannuation funds (commonly referred to as APRA regulated funds).
The costs include establishment, annual compliance costs, statutory fees and some investment management fees. Direct investment fees have been excluded.
What does the research tell us?
This research highlights that SMSFs with a low complexity can begin to become cost-effective at $100,000. This is a significant departure from what many had believed to be the case. For simple funds, $200,000 is a point where SMSFs can become cost competitive with APRA regulated funds or even cheaper if a low cost admin provider is used. With the proposed expansion to six member SMSFs, we may see many more take up this option at this threshold.
From a cost perspective, the real benefit of an SMSF is when it achieves scale in balance and this can occur when members pool their superannuation savings. The below comparison can be used to grasp the ranges you might fall into.
When determining whether an SMSF is right for you, your analysis must go further than just a simple comparison of the costs versus APRA Regulated Funds. It should also factor in your retirement and income goals and whether you have the desire, time and expertise to take on the role of an SMSF trustee. It’s also worth factoring in SMSF members may not receive the same level of protection in the event of theft or fraud that members in APRA regulated funds do.
If you would like to discuss whether an SMSF is right for you, please feel free to give me a call.
Earlier this month, the the SMSF Association released their research report on the ‘Cost of Operating SMSFs 2020’. No doubt the purpose of this was to provide guidance and insight regarding the cost-effectiveness of self-managed superannuation funds (SMSFs).
While everyone’s situation is unique, it does serve as a useful tool in deciding on whether an SMSF is right for you.
The research updates a report previously prepared by Rice Warner for ASIC in 2013. For this report, Rice Warner has also been given access to anonymised expense, cash flow and balance information for approximately 100,000 SMSFs. This has allowed them to consider actual costs incurred.
Some of the findings in relation to the range of costs for SMSFs are:
Be sure to do your own research and understand the limitations of this report in comparing the options relevant to you. In particular fee rebates or subsidies cannot be captured as part of the comparison with APRA regulated funds.
Your SMSF is a long-term plan. Much can happen during this time including illness, incapacity or death of a member.
It is best practice to have contingency plans in place to deal with unexpected events. For example, if a fund member dies, leaving you as the sole member are you happy to continue with the SMSF?
Outlined are some issues to consider planning for as trustees. Leaving the planning to when, and if an event happens may be too late.
Think about where you want your superannuation to go on your death. The introduction of the $1.6 million transfer balance cap means larger sums of money may need to leave the superannuation system sooner, as a result planning has never been more critical. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries.
The rules of your SMSF, as set out in your trust deed and related documents, determine how the trustee structure is to be reconstructed on the death of a member. It also details how death benefits are to be handled by you and your fund.
A lot of careful consideration needs to be given to understanding the member’s wishes to ensure that your fund’s trust deed and broader governing rules are drafted appropriately to achieve these requirements.
Legal tools to help direct your superannuation can include making a binding death benefit nomination to nominate who will receive your superannuation on your death or providing for your pension to continue (or revert) to a permitted beneficiary (such as your spouse) following your death.
You may also consider appointing a corporate trustee. If the membership of an SMSF with individual trustees changes, the names on the funds’ ownership documents must also change. This can be costly and time-consuming. A corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate planning of its members.
Diminished or loss of capacity
Consider the consequences if you become unable to act as trustee (e.g., due to mental incapacity). You can appoint an enduring power of attorney to act in your place as trustee, if required. This is someone who can be trusted to handle your financial affairs and can be appointed as trustee of the SMSF.
Member leaves the fund
How would your SMSF be affected if one or more of the fund members decided to exit the fund? For example, an SMSF heavily weighted in real estate may have to sell the asset or introduce a new fund member to allow the exiting member to transfer out of the fund.
Family law contains a number of options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately to your other property, and specialist advice may be needed.
Reviewing your insurance
SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance cover should be held for each SMSF member. Your insurance cover may be essential if an unexpected event occurs.
In some circumstances, you may already be holding insurance through membership of a large super fund. This policy may exist due to an employment arrangement and may be more cost-effective than an equivalent valued policy that you could hold within an SMSF. However, not all insurance policies are the same, so seeking advice will help you to understand your needs.
Administration of your SMSF
If an unexpected event occurs you may need to consider winding up the fund if managing the fund will be too time-consuming, onerous or costly for the remaining members.
As annual SMSF running costs generally remain fixed, your superannuation balance may fall to a level where it is not cost-effective to remain in an SMSF – at this point, it may be appropriate to transfer out of the fund (e.g., to a retail or industry fund).
How can we help?
If you need assistance with planning for an unexpected event or reviewing your current strategies, please feel free to give me a call to arrange a time to meet so that we can discuss your particular circumstances in more detail.
Divorce or relationship breakdowns have a significant impact on superannuation benefits as a result of the potential changes to individual member accounts. As the underlying circumstances of each relationship and corresponding superannuation benefits are unique, it really is a case by case scenario as to what the final outcome will be. Don’t start stressing just yet as it doesn’t always have to be complicated, and just because someone you know is still wearing some battle scars from their SMSF breakup isn’t indicative of what you will experience. From experience, the outcomes and time taken to reach these vary greatly. Key influences are how amicable the parties are, and how clear their documentation is in detailing what happens for a relationship breakdown.
So why is super such a key battleground when navigating a relationship breakdown?
Simply it is the economics. Super is one of the largest assets outside of the family home, so it makes sense that there is a significant focus placed on how the benefits are treated and divided as part of a divorce settlement. The Family Law Act 1975 details that superannuation interests form part of the definition of ‘property’ and can be divided in the event of a marriage breakdown (this also applies to de facto couples separating after 1 March 2009). The ramifications are that part of a members benefit which is currently invested in line with the fund’s investment strategy may be required to be transferred out of the fund to an ex-spouse.
The impact of divorce on an SMSF is significant and in extreme cases may result in the most appropriate action being to wind up the fund. Most commonly it is merely a matter of an ex-spouse leaving a fund or a splitting order requiring part of the remaining member’s balance to leave the fund. While simple even the rolling out of one member’s benefit can reduce the total size of the fund to a point where the economies of scale are no longer viable for an SMSF. Also, to free up the necessary cash to pay out the benefit assets may need to be sold. This adds complexity due to timing and potential tax consequences.
What are the key tension points?
We also see points of tension arise regularly where unlisted assets are involved which are to remain in the fund and there is disagreement on the valuation. Ultimately this is not an exhaustive list, but it does highlight the additional expenses and risks involved with SMSFs in a relationship breakdown.
Another tricky situation to navigate is the existing relationships with professional advisers such as financial advisers and accountants. In many cases, it may not be feasible both spouses to remain as clients of the current advisers and decisions will need to be made as to who retains the relationship. An alternative may be that a new neutral adviser is required for ongoing advice and services which are joint in nature. Unfortunately, divorce proceedings in some cases can drag on for several months and as a result, stretch across multiple financial years. The ongoing administration of the fund still needs to be completed, so making a decision as to who the fund will be engaging to complete this is something that cannot be deferred until a settlement is reached.
What are the options?
Ideally, the members of the fund would have a binding financial agreement which incorporates a superannuation agreement. This sets out the terms of how the superannuation benefits will be dealt with in the event of a relationship breakdown. By having this in place, it saves time, costs and frustration of having to come to terms after the fact when emotions may be running high.
If there is no superannuation agreement in place, then court orders will be required to split the super benefits. These court orders can take two forms:
Consent orders where a separating couple does not have a binding financial agreement but have reached an agreement on how their property should be divided.
Financial orders are required where a separating couple cannot reach an agreement on how their property should be split. The court then makes a decision and can issue a financial order to divide the couple’s assets based on what they deem appropriate given the individual circumstances.
Once one of the above outcomes are reached, then there may be a splitting order applied to superannuation benefits. It is important to note that superannuation rules, including preservation, still apply.
It is always advisable that Trustees seek legal advice from the lawyers who are assisting them with the settlement to see what the requirements are.
What happens if you can access your super?
There is a silver lining if you have access to your super benefits as a result of satisfying a condition of release or the benefit contains an unrestricted non-preserved component. You have more optionality for the funds. The advantage here is that you may have the option to receive the funds personally and not be limited to transferring the benefit within the superannuation system.
What happens if you can’t access you’re super?
Your benefit will need to be retained in the fund or rolled into another complying superannuation fund. A splitting order doesn’t change the preservation rules or components of your superannuation benefit, and if you are under preservation age, then the funds will need to remain in the superannuation system albeit with a new provider.
Tax implications if it’s shut down?
Depending on your age and working status, this can differ greatly. In accumulation phase, if assets are required to be sold to fund a payment out of the fund or a full wind up, then capital gains tax may apply. The amount will be 15% of the gain with a 33.33% discount applied for assets held for more than 12 months, bringing it down to 10%. This will impact both members benefits as the fund will need to factor in the tax before paying benefits out of the SMSF.
You can benefit from the CGT exemption that is available for assets in retirement phase. Timing is key here, and as a result, members should be sure to explore options for timing the sale of assets before making any transaction. In particular, if the members of the fund are close to preservation age, then there may be significant tax advantage on agreeing to delay the sale of any SMSF assets until the members can move the funds into retirement phase to access the CGT exemption.
What actions should you take?
If you are going through a relationship breakdown and have a self managed superannuation fund, then you should seek independent advice as soon as reasonably possible to best understand your options and what actions are required. If you have any queries about the points discussed above, then please feel free to reach out to me for a chat at firstname.lastname@example.org.
The decision to wind up your SMSF is one that should be made after careful consideration of your whole financial situation and implications of starting the process.
There are many reasons you may wish to wind up your SMSF, including
Prior to starting the process to wind up, you should first consider:
Once you have considered the above, the actual process of winding up the fund can be quite lengthy and should be started well before the end of the financial year.
Whether the benefits are to be paid via a lump sum to the member, or a rollover to another fund, it is likely that the assets of the SMSF will need to be sold. Depending on the nature of the asset, this could take some time. (Note there are some retail funds that can accept asset transfers for shares and funds rather than liquidating).
In the instance of rolling to another super fund, you will need to establish an account with your new fund, as the details of this as well as your member number will be needed by your fund administrator to complete a document called the rollover benefits statement (RBS). While doing this establishment of the new fund, it is also beneficial to request details on how the rollover can be physically paid (eg some require cheques only, some can accept BPay etc)
You will then need to request your fund administrator complete the interim accounts (and the rollover benefits statement if required). Remind them to take into account any final fees or tax payable/refundable prior to producing the rollover benefit statement.
Once the benefit has been paid to the member, arrange for the final tax return and audit. Once this has been completed and all receipts and liabilities have been covered, you can close the SMSF bank account. The SMSF must have a $0 balance when it is officially wound up.
If the SMSF has a trustee company, this will likely need to be wound up too if it has no other purpose.
In summary there are many legitimate reasons to winding up your SMSF, however it is not a decision to make lightly and give yourself plenty of time to complete the process in full.