Considerations when life changes

Entering retirement brings about a completely different set of circumstances an SMSF trustee needs to manage. Andrew Yee, superannuation director at HLB Mann Judd Sydney, identifies the changing circumstances of retirees as well as the plans that can help this lifestyle shift.

When Australians retire it’s relatively simple to switch from superannuation accumulation phase to pension mode, even for those who operate SMSFs.

However, commencing a pension is not the end of the story for retirees, particularly for SMSF members. There are a number of additional considerations around the investments supporting the pension that need to be addressed sooner rather than later for retirees.

Entering retirement sees objectives change and brings many lifestyle opportunities, however, conversely it can also result in a number of issues.

Superannuation benefits introduced during the final years of the Howard government encouraged Australians to put most, if not all, of their assets outside their home into super.

While taking advantage of the attractive benefits on offer at the time was a very sensible strategy, retirees still need to carefully manage their SMSF by taking into account areas such as estate planning. Further, management of the fund itself in later years, when mental capacity or interest may be waning, also requires consideration.

Running a fund is time-consuming and requires significant attention and understanding of compliance requirements, and as people get older, they may find they are less interested in taking the time to do this.

These factors, when coupled with everchanging and more complex regulatory requirements affecting the administration of an SMSF, mean trustees in retirement will need to be aware of their options and know where to go for help.

Statistics from the ATO show 41.4 per cent of all SMSF members are over the age of 64, up from 31.09 per cent in 2016 and 28.1 per cent in 2012. With an ageing population, we can expect to see a growing number of older SMSF members.

Therefore, from the retirement outset, it’s worthwhile taking into account the events likely to affect one’s SMSF and have strategies in place to deal with them.

Issues commonly faced by older-age members that need to be considered include:

• The death of a spouse who was the member primarily responsible for administering the fund and making investment decisions. If this happens without a suitable plan in place for someone else who has the required knowledge and experience to step in as trustee, and continue meeting the fund’s investment criteria, the fund may become non-complying and lose its tax advantages. This can be a heavy price to pay and additional penalties could also be imposed by the ATO.

• Trustees increasingly losing interest in managing their fund and making the investment decisions needed. Trustees about to retire shouldn’t make the assumption they will have lots of time in this new phase of their life to look after their super fund. A common complaint of retirees is there’s not enough time in the day to do everything they want. Managing an SMSF comes a distant last after grandchildren, golf, days out and holidays.

• Coupled with the above is declining health or ongoing ailments that prevent adequate research of investments, financial considerations, general administration and decision-making, even for those who want to do it.

• Loss of mental capacity is not something anyone wants to consider, but as we age, it’s inevitable we lose the ability to do the things we were once able to do.

• Changing family or investment circumstances will also affect the way finances are structured. For example, pension payments and poor investment returns might reduce the SMSF balances and cause a re-evaluation on whether to continue with the fund. Desire to help family and possible windfall gains (many Australians now retire when their parents are still alive) are also considerations.

As a result of the above, there are a number of elements to take into account when looking at whether winding up the SMSF is the best option or whether to undertake changes to give trustees additional support. For example, there may come a time when simply winding up the fund and transferring balances to a superannuation fund run by other trustees could be the best option.

However, this may be considered a last resort for many trustees and there are other alternatives to winding up an SMSF for members who no longer want the overall responsibility for the fund but would still like to keep it going. Some of these options include:

Small APRA fund

One alternative available to members of an SMSF is to transfer the trusteeship and convert the fund to a small Australian Prudential Regulation Authority (APRA) fund (SAF).

SAFs are similar to SMSFs, except an approved trustee is appointed to administer it and APRA replaces the ATO in its role as regulator.

The approved trustee is not a member of the fund, allowing the members to relinquish the responsibilities of the trustee role if they are becoming too onerous.

However, having an independent trustee in place comes with added costs and the investment strategy of the fund will be limited by the trustee’s investment policy, which can be restrictive.

There are a number of organisations now offering full trustee services that will undertake the role of approved trustee to run the SAF. These include organisations such as Australian Executor Trustees or Perpetual Trustees, but SMSF trustees need to compare benefits and the downside with other options.

Younger members

Another option for older SMSF members is to encourage their children or grandchildren to become members/trustees of their fund as SMSFs can now have up to six members, allowing multiple generations to be involved. An SMSF can be refreshed by appointing younger trustees and members, who can over time take over the day-to-day running and administration of the fund.

Additional members can also make super contributions and inject new capital into the fund, which can be beneficial for the fund investment strategy if the older members are no longer contributing and are entirely in drawdown phase.

Alternative director

SMSF members who lose interest in the day-to-day running of the fund, or become incapable of fulfilling their role as trustee due to illness, may be able to appoint another individual as an alternative director to act in their place.

This option is only available to funds with a corporate trustee structure as trust law does not allow an individual to pass these responsibilities to another individual.

However, a fund with individual trustees may be able to use an enduring power of attorney to act on behalf of the trustees.

SMSFs that have an individual trustee structure can change to a corporate trustee, but there is expense involved with this switch.

Another downside with alternative directors is they cannot step in if the primary director/fund member has lost mental capacity.

The appointment of a successor director or an enduring power of attorney as director would overcome this problem.

Appointing an enduring power of attorney

The SMSF trustee and member rules of the Superannuation Industry (Supervision) Act 1993 allow a person who holds an enduring power of attorney to act as a trustee, or director of the corporate trustee, of a super fund in place of the member in question without causing the SMSF to cease its operation.

Under this option, the person who holds the enduring power of attorney for a member becomes their legal personal representative (LPR) and the member must cease to be a trustee of the SMSF, or a director of the corporate trustee, except where the LPR is appointed as an alternative director.

Ongoing advice

One of the responsibilities of having an SMSF is that an annual audit is required. There are also seemingly never-ending regulatory changes, some of which can create new opportunities for trustees or affect the way a fund is structured.

Ongoing help and advice are essential, and trustees should look at it not as a necessary evil, but a chance to ensure all investment opportunities are considered and to maintain understanding of the fund’s position.

A major benefit of involving external advisers is if one of the members has traditionally looked after the fund on behalf of their spouse, the spouse can be involved in discussions with the adviser about the fund.

By doing so, the knowledge is transferred, which can be essential if the main decision-maker in a marriage or relationship pre-deceases the other.

Executor

Having a will is essential for all adult Australians and is even more critical for retirees.

In estate planning, it is often the case that not enough thought is given to the person appointed as executor.

Asking someone you like and trust is not enough. If they are the same age, or even older than you, it is possible they will pre-decease you. Appointing a good friend who is not financially savvy is another mistake often made. A good test is to ask yourself whether you would trust this person to run your financial affairs. If the answer is no, why would you appoint them to make decisions on your behalf as executor of your estate?

Estate planning

For those who haven’t already done something about estate planning, retirement should be a trigger for setting affairs in order and documenting them.

This is particularly important for SMSF trustees who have much of their personal wealth owned within the fund.

Record-keeping is essential for regulatory purposes, but having someone else knowing where all the records are, and how to access different accounts and other investments, is essential.

The importance of having a will goes without saying, but updating it to take into account changed financial circumstances and personal relations is often overlooked.

So, while there are evidently a number of considerations to be made by ageing SMSF members/trustees, the need for careful planning sooner rather than later can never be understated.

Retirement should be a trigger point for ensuring the running of an SMSF is optimal not just for now, but also in the future.

Small changes could help ensure the twilight years are spent enjoying time with children and grandchildren and not erroneously administering a lifetime’s worth of investments.