Lifecycle of a SMSF

Establishing your SMSF is obviously the starting point, and involves appointing trustees, obtaining a trust deed for the fund, and completing the ATO application form to register as a superannuation entity. The ATO will then provide you with a tax file number, an ABN, and a notice stating that you are now a “regulated super fund” which you’ll need to provide to any commercial super fund you may be in to rollover any super monies it may hold.

Estate Planning: Whilst superannuation is primarily about retirement income, one of the other primary purposes of super is to provide benefits to your dependants in the event of your death. This is typically thought of as being an ‘end-event’ in the lifecycle of a SMSF, however it’s actually something that needs to be planned for at the start, because you just never know when your time is up. This will generally involve a death benefit nomination (or death benefit rule) and may involve some strategic thinking along with the setting up of insurance policies.

This is where you either make an initial contribution to your SMSF, and/or rollover your super monies from an existing super fund once your SMSF is established. Then, whilst you are in the accumulation phase (i.e. still working, or not old enough yet to meet a condition of release) you can continue to make contributions. Note there are a number of different types of contributions, tax concessions, and some rules around who can contribute. You also need to make sure you have the annual administration and audit completed for the fund each year.

This is where your focus is on generating as much total return as possible from your investments within your SMSF, whilst staying within your own personal risk and volatility tolerance, and not taking extreme risks that have a high potential to blow up your fund. You create for yourself a sensible, prudent investment strategy which is embodied in your Written Investment Strategy document.

Insurance: while still in the accumulation phase, insurance is taken out to fund your estate plan that we mentioned earlier. This is essentially what is used to look after the family in the event of your death or permanent disability. Temporary disability insurance can also be taken out, although there is an option for the SMSF to self-fund this insurance. Premiums paid for insurance are tax deductable to the fund.

This is where a ‘condition of release’ has been satisfied to release money out of your SMSF. The most typical of these is where you have permanently retired from work and have reached your preservation age (currently age 55), have reached age 60 and have stopped a work arrangement, or have reached age 65 where your work status is irrelevant, and have commenced an income stream (pension) from your SMSF. This is known as being in the “pension phase” of the fund. Note however that there are other conditions of release such as transition to retirement pensions, total & permanent disability, and temporary disability.

Transition to Retirement: This will only apply to certain people (those who have reached preservation age, currently age 55) and involves taking a “transition to retirement” pension from your SMSF, where you may still be working (part time etc.) but need a top up of income from your SMSF assets. However, you can’t access any capital (lump sums) until you meet a full condition of release.

This is where your focus will probably shift to one of generating a good solid dependable income from your investments to fund your pension payments, yet still with the potential for some capital growth to keep up with inflation. Your personal risk and volatility tolerance will probably become lower, because when you’re taking regular pension payments you just cannot afford any large drops in your capital to occur. You create for yourself a sensible, prudent, income focused investment strategy which is embodied in a new Written Investment Strategy document.

Not an event to look forward to, but one of the most significant for a SMSF. This is where your estate plan kicks in, and your death benefit instructions (if any) are carried out. Sometimes there is nothing to happen, such as where a reversionary pension simply ‘reverts’ to a surviving spouse.

On the death of a member of a SMSF, there is always the question of whether or not the fund will be wound up, or left to continue on. Whilst the idea of an SMSF being this indefinite inter-generational wealth vehicle sounds great, the practical reality is that the factors affecting this decision will generally come from two area’s: 1) The estate plan of the deceased, and 2) The willingness and ability of the remaining (or new) trustees to continue to perform the trustee role. For the SMSF to continue on, the remaining (or new) trustees need to be up to the responsibilities of trusteeship. This is not always the case, but where it is, the SMSF lives on and in some cases passes to the next generation, and hence we go back to the top of this list and we start the lifecycle again.