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John Maroney, CEO of the SMSF Association gives new financial year tips for SMSF trustees, including around Downsizer contributions, what younger trustees need to consider, and what principles to remember in times of market volatility.
Do you have any tips on what SMSF trustees should be considering at the start of a new financial year?
So each new financial year does provide an opportunity to reset your contribution plans. There are opportunities in terms if you haven’t used a bring-forward arrangement to be looking potentially bringing forward three years of contributions, which is very important for those that are getting closer to retirement and perhaps haven’t put away as much as they wish to.
And that could work well for both partners. If you’re talking about a couple that are being involved and making sure that look to the future, how much do you want to have saved up by the time you get to retirement? Investment markets have been volatile so a lot of people will probably find that there might be a bit of catch up needed sometime over the next few years and the earlier in the financial year you plan it, then you got a full financial year to manage that with your income and if you are realising assets outside superannuation to bring them in.
So even if you didn’t do everything you wanted to by 30 June, don’t wait till next June to move on with that. Start the planning immediately, get advice if that’s going to be of assistance and make sure you cover all the options for building up sufficient assets.
And if you’re already getting close to stage, consider transition-to-retirement. Pensions are a useful way of helping rebalance arrangements. And if it’s a couple again involved equalising out the balances, which can take a few years, can be a good way of avoiding one partner going over the transfer balance cap which does have some tax advantages.
As well as looking at the investment strategy which all SMSF trustees should be doing at least on an annual basis and generally are required to do that on an annual basis to satisfy audit requirements and the regulatory requirements.
What are some important points for trustees that are now considering Downsizer contributions?
So there’s a basic rule of having owned the house for ten years before that you’re able to use it for downsizing. Having the age reduced from 65 to 60 brings a lot more people being eligible for it, and the government has said they will reduce that to age 55 but we’re not quite sure yet when that will take effect. But again, that broadens the market.
One of the key things is up to $300,000 contribution from each partner isn’t counted against the contribution caps. But it’s important that if you get above the $1.7 million of total super balance then you’re not able to make non-concessional contributions.
So if you want to do both non-concessional contributions and the Downsizer contributions, it’s more efficient to put in the non-concessional contributions first before you put in the Downsizer. Because if you put in the Downsizer that might rule out your ability to put in non-concessional contributions at a later stage.
Do you have any tips for younger SMSF trustees who are starting their first year with an SMSF?
Probably one of the things is, generally younger people and there are more younger people setting up self-managed super funds, so they generally will be starting with a lower balance than people starting later in their careers because they haven’t had as much time to accumulate as much superannuation. But provided they have sufficient in the balance to make it competitive, and they are interested in putting the time and they have the financial literacy, then there are advantages in starting early because some of the benefits accrue more over a longer period of time.
And it certainly assists in making sure you’ve got the advice before you start up. But if you’re starting up with a smaller balance because you’re planning on moving in some assets from other sources, whether it’s from property sales or from shifting non-superannuation investments into there. It’s good to have a plan when you start. Even if it does take 3, 6, 9, 12 months or longer depending on if you’re selling other illiquid assets that might take a while to move them in.
But have that plan as much fleshed out with advice where appropriate and keep an eye on the plan and keep moving towards it because a lot of people sort of start with a plan and then perhaps get distracted and don’t continue with it.
And the last thing you want to see is young people coming in, moving a large amount of cash into a self-managed super fund and leaving it sit there in cash because they’re not sure about what’s a good time to go into the market.
And the old adage the most important thing is time in the market rather than trying to time the market. It looks pretty good at the moment in terms of market values are down on most of the share markets and some other asset classes. So now it looks like a good time. But have that plan and sort of stick to that plan over the months and years ahead is probably the most important thing.
With rising inflation, interest rates and market volatility, what are some principles that trustees should be reminding themselves at the moment?
That’s very much the situation we’re in, it’s probably the most volatile it’s been for a decade or more. We haven’t seen increasing interest rates in Australia or most parts of the developed world for over a decade since before the global financial crisis. And that is leading to concerns, some of those relate to inflation. Some of the inflationary pressures may turn out to be temporary but we don’t know yet. So at the moment it is looking more challenging for how do people respond to that, how is that going to reflect in the outlook for different industries, different companies?
And so there is more uncertainty and that’s where it’s really important to have a strategy that you understand, so that you are investing in a sensible long-term fashion and not trying to chase the short-term market movements. Because they’re very difficult for the professionals to do, and it can be even more so for individuals that don’t have as much time or experience as professional investment managers.
And that’s where having specialist advisors to assist in that process is really important. Both to set up the plan to help with the emotional reaction if suddenly markets head down 10% or 20%. Yes, that can be very worrying. But the worst thing you can do is crystallise your losses by cashing out at a time when markets have dropped rather than recognising market fluctuations are a natural part of the system.
In the long-term, certainly the main share markets in Australia, US, Asia, Europe have generally been good long-term investments, but they do have significant fluctuations from time to time. And the worst thing you can do is cash out at the bottom. Far better to stay in there, ride the waves and wait for the upturn, which has usually happened pretty regularly in the past.
And over a 7-10 year plus timeframe most of those bumps get ironed out, and the alternative of keeping money invested in cash and other defensive assets has generally been sub-optimal and produced lower long-term performance than being prepared to experience market volatility that does relate to your own risk appetite, that you’ve got to be comfortable with it.
But that’s where advice can be really helpful in both setting the plans and giving you reassurance that sticking with the plan is crucial to achieve the good long-term results.