In a blog, SuperConcepts executive manager for SMSF technical and private wealth Graeme Colley said the recent reduction in the minimum pension percentages for the 2019–20 and 2020–21 financial years can be helpful to ride over the volatility, but the real issue is when retirees require a greater amount to live.
According to Mr Colley, this is where both diversification and cash flow become important.
“An SMSF where the members have planned cash flows will usually be able to ride over the ups and downs in the market for a reasonable time,” he said.
“However, those SMSFs which have high concentrations of investments in lumpy assets such as real estate may have tenants who have had to cease business for a short time or permanently.
“This may require the trustees to take strategic action to protect the property from being sold in a soft market.”
Mr Colley said possible options to take if the fund has a cash-flow issue are for the members to stop their pensions and transfer their balance to accumulation phase.
While that may leave them with little to live on, Mr Colley noted the strategy will at least retain the property and other assets within the fund.
“The fund will have a reduced cash outflow, but there are still some fund expenses such as maintenance of the property, utilities as well as rates and taxes,” he said.
“By stopping a pension and transferring the balance to accumulation phase, it will reduce the amount that is counted against your transfer balance cap.
“If you decide to restart the pension at a later date, it will give you some cap space to fill and the fund will receive tax exemption on any income earned on those pension assets.”
Mr Colley advised that planning is essential in the current crisis as the amount a retiree needs to live on is the most important thing now and on an ongoing basis.
“The size of your pension account at the beginning of each year dictates the minimum you are required to withdraw and having the cash flow will determine whether it is possible. So, having a two- or three-year cash pool to ride out the current storm may save a fire sale of other fund assets,” he said.
