The pension phase of self-managed superannuation funds (SMSF) is a hot topic at many barbeques of late.
While it’s interesting to see the progression of discussion through the SMSF lifecycle; SMSF exit strategy is an area that also deserves some serious consideration.
Some disturbing news
Here is a summary of an article I recently read which highlighted some disturbing Australian Taxation Office, SMSF statistics. (SMSF sector enters next phase, http://www.financialstandard.com.au/news/view/47557624)
According to ATO statistics, the amount of money entering self-managed super funds (SMSF) is now exceeded by the benefit payments being taken out by members.
In the 2012/13 financial year, ingoing flows from member, employer and other contributions to the funds equalled $24.1 billion.
This figure was lower than $26.4 billion which was taken out in benefit payments during the same period.
That’s a $2.3 billion difference.
The preceding year $27 billion went in and only $22.8 billion taken out.
What does this mean?
What this means is that more and more members of self-managed super funds are reaching a matured stage of their fund.
The SMSF early adaptors’ funds are reaching maturity and they are drawing down the fruits of their labour.
And while there is still a large amount of money being rolled into these funds, the overall trend is changing.
A large amount of funds are being taken out in pensions and other phases.
It is predicted that in five years’ time we will see many more drawdowns from SMSFs.
Financial planners need to move their focus away from creating funds and creating wealth, towards strategies of distribution of that wealth by way of member payment and the winding up of funds.
Exit strategy and wealth distribution are areas in SMSFs that I have felt have long been overlooked.
Often there has been no exit strategy put in place for trustees or members who, due to death or serious illness need to retire from the fund.
From a management point of view it is pleasing to see the trend of having income streams as the preferred method of which payments are being made.
This means members are using the fund to provide tax effective ongoing income, rather than taking a lump sum; spending it or placing it in a less tax effective investment.
The total SMSF payments taken as lump sums have fallen by 22% since 2009; now they are taken in pension phase.
Increased ‘longevity risk’ is a concern among the aging population who are living longer than they had expected to.
SMSF are a very tax effective way to provide you with a self-controlled retirement income stream.
Discuss your options with your financial adviser.
Do you have an SMSF exit strategy?
Who will manage your exit if you are no longer able to, due to incapacity, are unable to provide your own trustee services or simply no longer have the desire to manage it yourself?
The solution is to work with a financial planner who specialises in SMSFs.
Talk to the Monash Group Financial Planners team to find out how.