Pension phase SMSFs falling into illiquidity traps, warns analyst

Pension phase SMSFs falling into illiquidity traps, warns analyst

An increasing number of SMSFs approaching retirement or entering the pension phase are investing in large, bulky illiquid assets and consequently struggling to make minimum pension payments, an investment analyst has warned.

Speaking to SMSF Adviser, Wealth Within chief analyst Dale Gillham said he is seeing some SMSFs become involved in investments that are too high risk or illiquid for the life stage they are at, which is having negative consequences further down the line.

“I’m finding 55- or 60-year olds looking at buying into property and leveraging and buying funds to get into property for their super fund and it’s not necessarily a good investment at that stage when you’re just about to move into retirement,” said Mr Gillham.

In some cases, where the property or illiquid asset comprises a large proportion of the fund, SMSF trustees are finding themselves unable to meet the minimum payment requirements for their pension, he said.

“Whilst I do invest in property myself and promote people to do that, you’ve really got to have a balance,” he said.

“Especially in the retirement phase you’ve got to have more secure, liquid investments, and property doesn’t do that for you.”

In a presentation at the recent CPA SMSF conference, ATO assistant commissioner Kasey Macfarlane addressed similar issues.

“It’s not my intention to comment on whether or not real property is a good long-term investment; I just want to point out that it is undoubtedly a lumpy and illiquid asset and can present a liquidity problem, especially when it’s an SMSF’s major asset,” said Ms Macfarlane.

“For example, we see SMSFs paying pensions where the net rental income is insufficient and there are no other liquid assets or contributions being made to the SMSF.”

Mr Gillham said the problem was primarily an issue with unadvised SMSF trustees and stressed the important role accountants and advisers have in helping clients establish appropriate strategies.

Using large proportions of an SMSF to buy property is not something advisers would recommend since SMSF trustees "should have a spread of asset allocation", he said.

Mr Gillham said that ultimately, trustees are responsible and accountable for understanding the requirements of running an SMSF but added that advisers and accountants can help educate clients not only in their duties around compliance but also in the investment management of the fund.

Pension phase SMSFs falling into illiquidity traps, warns analyst
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