In the pension phase of a SMSF, trustees need to plan ahead if they don’t want to run the risk of being hit by tax and forced liquidation of assets.
It is important that SMSF trustees understand that their SMSF needs cash available to meet pension payment requirements. Unfortunately it has been my experience, when taking on a new SMSF client, that often the trustee and/or financial advisor have got it wrong.
In particular, I am often surprised by how often self-directed SMSF trustees who come to me for advice tell me that they do not have enough cash to meet their pension requirements. To meet their 30 June deadline requirements, they are often forced to sell something from their portfolio to make the payment.
This appears to be mainly because retirees have focused on returns and how long their savings will last, and have overlooked the need to have cash available throughout the year in their SMSF to make regular pension payments.
It is very important that SMSF trustees understand that if the payment is not made, the SMSF loses the tax-free status of a pension-paying fund and goes back to being taxed.
The SMSF may incur unnecessary fees and brokerage in liquidating assets, as well as lost opportunity, if the SMSF trustee does not plan ahead.
This does not mean that the asset mix needs to change dramatically in the retirement/pension phase to achieve this, it may just mean needing to move towards more high-yielding assets.
SMSF trustees need to also understand the different levels of liquidity in fixed interest investments and cash deposits, such as term deposits.
It has always been my advice to SMSF trustees, with a SMSF in pension mode, to keep at least two to three years pension in cash. This includes separating it from term deposits so that it is always available.
Contact your Expert on Self Managed Super Funds in Perth today and call Paul Baggetta on 9317 7300.
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Paul Baggetta is the Founder & Principal of Baggetta & Co. Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.
Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.
Taxation & Accounting services are provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, FIPA & NTAA.