THE LIFECYCLE OF A SMSF
Superannuation can be a difficult subject for many people to wrap their heads around as there are so many moving parts to it.
However, when you lay it out and think of the lifecycle of a SMSF and focus on each segment individually you start to see how it all works together, and why SMSFs have become known as not just another super fund, but a family wealth building and succession vehicle.
1. SETTING UP THE SMSF
The starting point of a SMSF is obviously the initial setup of the fund, where trustees are appointed, a trust deed is obtained, and the fund is registered as a superannuation entity with the ATO (elect to be a regulated fund). The fund with then be issued with a tax file number and an ABN, which will be needed for setting up a bank account and for rolling over any superannuation monies from the member's industry or retail super funds. See our section on “SMSF Setups” for more detailed information.
Estate Planning : It may seem odd that we have this at the start given estate planning if often thought of as an “end of cycle” event, however the reality is that the timing of the death or disability of a member is completely unknown, hence it should be considered and included in the initial planning of the fund. Apart from executing binding death benefit nominations for each member, this may also include establishment of insurance policies within the SMSF.
2. MONEY GOES IN - ROLLOVERS AND CONTRIBUTIONS
The most common way money initially goes into a new SMSF is where members rollover their accumulated balances from their respective industry of retail superannuation funds. This may also include other personal lump sum contributions.
If a member is still working and in the accumulation phase, then they will also have ongoing contributions going into the SMSF, either as SGC from their employer or via their own contributions. There are a variety of contribution types with various tax concessions and rules around them, which you can learn more about on this website.
3. INVESTMENTS AND INSURANCE
Investing: once rollovers and / or lump sum contributions are complete, trustees can then move onto the part everyone looks forward to – the actual investing. Whilst there are some rules around this, there is also a very wide choice of options.
Part of this is the requirement to create a written investment strategy document, which must be regularly reviewed.
Insurance: we mentioned estate planning in the first phase, and insurance is the method through which many people (particularly the younger members in the accumulation phase) will actually fund their estate plan in the event of their death or permanent disability. Temporary disability insurance (via income protection insurance) is also an option.
4. MONEY COMES OUT - PENSIONS &/OR LUMP SUMS
Once a 'condition of release' has been met to release money out of an SMSF (such as retirement) a member will then move into the next phase of the lifecycle of the fund, which is the retirement phase. For most people, this will mean the commencement of a tax free pension (aka income stream) from the fund post age 60, and or other tax free lump sum withdrawals as the needs arise.
Note that there is a half step before this that some people take, which is known as the “Transition to Retirement” phase. This is where a member has reached their preservation age, and may still be working say part time, but needs a top up of income from their SMSF assets to meet their living expenses. Hence it’s a half step, or “transition” to retirement, and they begin what is known as a Transition to Retirement pension. This pension provides an income stream, but there is no access to capital (lump sums) until a full condition of release is met and they move fully into the retirement phase.
5. INVESTING CHANGE IN PENSION PHASE
This is a step that is often ignored or missed out by the vast majority of SMSFs. The reality is that the actual needs of the SMSF member change once they enter into the retirement phase, with the need for certainty rising significantly. With no more work income coming in, and an amount of capital that needs to produce income AND last many years, the risk element of the fund's investment strategy also needs to be re-assessed as the tolerance for a large drawdown in capital will have significantly decreased.
If a change in strategy is warranted, then this should be reflected in a new written Investment Strategy document.
6. ESTATE PLAN IS IMPLEMENTED ON DEATH
In the event of the death of a member, that member’s estate plan comes into play and the instructions as per their binding death benefit nomination are carried out. Sometimes this may be quite simple, such as where a pension that was established as a “reversionary pension” starts to be paid to a surviving spouse. In other situations, some more significant actions need to be carried out.
7. DOES THE SMSF CONTINUE OF IS IT WOUND UP?
In the event of a SMSF member death, the remaining trustee(s) will face a decision regarding the future of the fund – should it be wound up, or should it continue?
The answer to that question will be based on a range of factors and the individual circumstances of the remaining (or potential new) trustees, and should be thought through with care.
Indeed, one of the benefits touted about SMSFs is that they can be an indefinite inter-generational wealth vehicle, being passed from one generation to the next. And this is true, however this is also dependant on a few things, the first being that the next generation actually want (and are able to) take on the responsibilities of trusteeship of an SMSF. This should not be taken for granted or assumed.
However in the event that either the remaining trustees are willing and able to continue, or perhaps the next generation of the family comes in and become members and trustees, then the SMSF continues on, and in some member cases, the lifecycle begins again.