When transitioning from the accumulation phase to the pension phase in a Self-Managed Super Fund (SMSF), it’s crucial to reassess your fund’s investment strategy. In fact, as we highlighted in our blog a few months ago, there are several other events – such as changes in fund membership, modifications to the investments held, or even market corrections – that should also prompt a review of your strategy.
The shift from building wealth to drawing down income introduces a new set of financial dynamics, requiring careful planning to ensure liquidity, compliance, and long-term sustainability.
Why review your investment strategy?
Starting a pension triggers a change in how your SMSF operates. For years, contributions and earnings have grown your fund, but the transition to pension phase introduces the need for regular cash flow to meet minimum pension payments. This shift makes it essential to ensure there are enough liquid assets to cover these payments comfortably.
Additionally, reviewing your investment strategy helps you assess if your fund’s assets align with your retirement goals. It’s not just about meeting the minimum requirements; it’s about ensuring the fund can sustainably support your desired pension level without undue financial stress.
Key considerations when starting a pension
- Liquidity needs: Minimum pension payments must be met annually, and it’s important that your SMSF holds enough liquid assets – such as cash or easily sellable investments – to cover these obligations. If your fund is heavily weighted towards liquid assets like property, there could be challenges in generating the required cash flow without selling off significant holdings.
- Income generation: A review allows trustees to evaluate if the income generated from the fund’s assets is sufficient to support pension payments. This includes rental income, dividends, and interest. If the fund is not generating enough income, it may require adjustments to the investment strategy.
- Asset allocation: The risk profile and asset mix may need adjustment to prioritise stability and liquidity. While growth assets like shares may have been suitable during the accumulation phase, pension phase often demands a greater focus on income-producing and easily accessible investments.
- Compliance requirements: Ensuring minimum pension payments are met is crucial for maintaining the fund’s tax concessions. Failing to make the minimum payments can result in the loss of the fund’s entitlement to exempt current pension income (ECPI).
- Long-term sustainability: Trustees must consider the long-term sustainability of the fund. This includes planning for market fluctuations, adjusting for inflation, and managing cash reserves to avoid depleting capital too quickly.
Ongoing review and adjustment
Starting a pension is not a one-time event for review. As mentioned earlier, Trustees should commit to regularly reviewing the fund’s investment strategy to respond to changes in the market, member needs, or unexpected financial events. An annual review, at minimum, helps ensure the fund remains on track to meet its obligations and members’ retirement goals.
Staying on track
When a member transitions to pension phase, it’s a significant milestone for any SMSF. By revisiting your investment strategy, assessing liquidity, and ensuring compliance, trustees can help safeguard the fund’s capacity to meet pension payments while supporting long-term growth. Regular reviews are key to staying ahead of potential issues and optimising your SMSF’s performance during retirement.
Please contact our team if you have any queries.