Happy New Year our readers!
Now we have a new calendar year under way, what are some of the broader issues SMSF trustees should consider before looking at the detail in the coming months?
There are four things to think about – investment strategies, the ageing population, changes to the super laws and finally the federal election and superannuation.
1. Review Investment Strategy
Never forget the importance of the SMSF’s investment strategy as the fund moves through accumulation and retirement phases. It’s a new year, so perhaps the time to revisit the fund’s investment strategy to make sure it continues to be fit for purpose. There are many questions to find answers to, such as:-
- do the proportion of investments in various asset classes require rebalancing
- has someone joined or left the fund, or
- did a member start or stop a pension.
If the trustees have the appropriate knowledge and skills then they can decide how the investment strategy should be modified. However, for those who are unsure, input from a suitably qualified and licensed professional can come in handy.
One of the considerations for an investment strategy under the superannuation law is the liquidity and cash flow of the SMSF. This involves understanding whether the fund can meet its liabilities and expenses, such as loan repayments if the fund has a limited recourse borrowing arrangement or payment of pensions and other fund expenses. For an SMSF that is overweight in a particular asset class the fund may not be in breach of any investment guidelines, but can the position be justified by the trustees, given they need to show how the investments dovetail into the member’s retirement savings? How is investing a high proportion of members’ retirement savings in one asset or an asset class going to meet their retirement goals?
Another aspect of a fund’s investment strategy is insurance which must be considered as part of any investment strategy review. Australians in general (and younger Australians in particular) are notoriously under-insured when it comes to personal insurance; life insurance, disability insurance and so on. Most people have little hesitation to insure their possessions but are unlikely to insure the source of income that purchases those possessions of income, that is themselves.
An SMSF can be a good option for holding insurance policies on member’s lives or when they are disabled. There are some useful strategies when it comes to insurance through SMSFs for younger people, so this year might be a good time to explore insurance – especially for younger generations.
2. Australia’s ageing population
Since 2011 – when the first of the baby boomer’s generation turned 65 – the percentage of the retirement age population increased significantly and the share of the population of prime working age began to fall. These events flow through to taxation as they result in a reduction in the government’s revenue because of lower labour force participation and greater demand for government programs that support older Australians.
So older Australians may need to rely more on their superannuation savings during retirement as they will most likely be living longer than any previous generation. The question they need to address is whether their retirement savings in their SMSF and other resources of income run out before them?
Estate and succession planning is also an important consideration. As our population ages, issues like dementia and other disabilities can affect qualifies as a trustee of an SMSF. If the trustee of the SMSF is incapacitated because they cannot undertake their trustee duties, the fund can fail to qualify as an SMSF. This could lead to compliance issues meaning that succession planning is crucially important in 2022.
In the same vein, what happens to member benefits and the fund when a member passes away is something that, unfortunately, will become an increasingly likely occurrence, as baby boomers hit their seventies and beyond. This year, more people will need to take steps to ensure the right outcomes occur on their demise, such as, who gets their super benefits when they die and how will it be paid? Is it better to have money in the super system, or is it better to invest it personally and pay tax at personal rates? What tax imposts are there (CGT, lump sum tax)? Are there strategies members should be thinking about to reduce tax now?
3. Legislative changes
There are a number of changes to the super legislation in 2022 particularly to the contribution rules. At the end of 2021, the government introduced the Treasury Laws Amendment (Enhancing superannuation outcomes for Australians and helping Australian businesses invest) Bill 2021 into Parliament. The bill aims to improve flexibility for Australians preparing for retirement mainly by making changes to the contribution rules.
Currently, anyone under age 67 can contribute to super without having to meet a work test. The bill essentially abolishes the work test (40 hours work in a 30-day period) so Australians aged between 67 and 75 can also make non-concessional contributions to superannuation. As expected, the new rules also extend to bring forward opportunities up until the year in which the member turns 75. So, someone 74 on 1 July would have up to their 75th birthday to make a non-concessional contribution using the bring-forward rule. This could allow re-contribution strategies to alter the mix of tax-free/taxable components in a member’s benefit for estate planning purposes.
4. Finally, the Budget and election
This year a federal election must be held by May 2022 and the government has currently set a date for a budget in March. Budgets in an election year usually provide some sweeteners and the superannuation changes currently in the parliament are a good example of that.
We certainly live in interesting times.
Subscribe below SMSF News to receive my latest articlesGraeme Colley, Executive Manager, SMSF Technical and Private Wealth SuperConcepts
While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (AMP Capital) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. The information contained in this document are for illustrative purposes only and this document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital. This document is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.