Liam Shorte, director of SONAS Wealth, emphasised on the latest ASF Audits podcast that SMSF trustees should always have a “plan B” for their retirement savings structure to safeguard against unforeseen events or circumstances.
“It’s always a case of you have to have a plan B. What if it doesn’t work out? [I have seen] a lot of people set up an SMSF and started trading themselves, they bought a good portfolio, but then they just lost interest,” Shorte said.
“You’ve got to pick a time every one or three years and consider whether this is still the right thing and don’t be afraid to walk away from it if it isn’t because if you start leaving money sitting in cash, and a lot of people did this during COVID, you miss out on three or four good years of returns and you’ve lost that compound growth for the period.”
Shorte said as part of an exit strategy, trustees need to consider how their investments could be affected.
“[Think about] if you’re buying a property in an SMSF or going heavily into single assets – what could happen if you’re sick or retrenched or your partner is ill?
“Do you have insurance in place to make sure that you can continue to have contributions going in to cover the shortfall? The interest rates on loans in an SMSF are pretty high, and we know rental yields in Australia are not great, so you’ve got to know what happens if something goes wrong.”
In many cases, one member of a couple takes the lead in setting up the SMSF, and if that person falls ill, it can place a significant burden on the other partner who may not be as engaged in managing the fund.
“They then often become the target of everybody’s advice. Everybody’s suddenly giving them advice,” Shorte said.
“You should sit down with clients and go, ‘Look, you’re 75, if something happens to you your partner has never dealt with the money in the fund, what would you want me to do?’ and work out how they could sell down the portfolio if there are different pensions or different tax components, move those out of the fund into a retail or industry fund, and set up a large, steady income for that member.”
SMSF trustees should be aware of the steps for exiting a fund upfront and advisers should put these steps in place as part of the regulations, he added.
“It’s also important to realise that situations may occur where you are not going to get a lot of notice about or it’s something that may not happen suddenly, such as prolonged illness.”
“As a trustee, you need to be very sure that lease payments are being made if it’s a business or real property leased back to the business. Make sure that everything is still being done properly because you’ve got to deal with it at arm’s length,” he said.
“Just because one of you is ill, the business may not be going as well, and the income is not coming through, it still needs to pay its payments to the super fund and the trustees need to ensure those payments will be made, otherwise it’ll be a breach of the sole purpose test.”
