In December 2023, Treasury released a consultation paper to consider whether SMSFs should be included in the retirement income covenant (RIC), which requires superannuation fund trustees to actively consider the retirement income needs of fund members.
Ahead of the SMSF Adviser Technical Strategy Day 2024, MLC TechConnect senior technical services manager Julie Steed said that the integration could help some trustees focus on the drawdown phase and ensure that their retirement income lasts until their death.
On the other hand, Steed pointed out that including SMSFs in the RIC could be an additional “red tape measure that is unnecessary” because trustees are already required to consider their investment composition and risk under the Investment Strategy Covenant.
In addition, Steed echoed arguments made by the Institute of Financial Professionals Australia that SMSF members are already highly engaged with their superannuation and have the flexibility to include any retirement product they want provided that it complies with superannuation law.
“Their primary objective is to accumulate retirement savings,” Steed told SMSF Adviser.
“SMSF members generally have more flexibility than APRA-regulated fund members, as long as their trust deed allows them to do what they need to. If it doesn’t, they can get it amended to suit their needs.
“For example, if a member wants a deferred or lifetime annuity or any type of life product that shields them against longevity risk, they could acquire and hold it in their SMSF.”
During her session at the SMSF Adviser Technical Strategy Day 2024, Steed will unpack the pros and cons of potentially including SMSFs in the RIC, and offer practical strategies on how members could protect themselves against longevity risk while aligning their investment strategies with retirement income objectives.
The potential integration of SMSFs into the RIC could have implications for trustees around its practical implementation, Steed said.
“For instance, does it mean that we would incorporate it as an expansion of the investment strategy and objectives?” she asked.
“How would trustees incorporate the documentation around RIC requirements into their SMSFs?
Steed urged SMSF trustees to consider what is already covered in their investment objectives and strategies, and whether there are additional requirements to be fulfilled.
How advisers could help trustees
Advisers have a role to play in guiding SMSF members on the amount of savings required to meet their expenses and lifestyle expectations, Steed said.
She noted that the lifestyle expectations of Baby Boomer retirees could exceed the current generation of retirees and result in them spending more in retirement and that they already spend more than the previous generation while still in the workforce.
“I know different sectors of government are concerned that the current generation of retirees are using superannuation as an estate planning tool, and that they’re not drawing down on their superannuation because they want to leave bequests to their adult children,” Steed said.
“But my personal observation is that this is far from the truth. The current generation of retirees is so conservative. They’ve lived through periods of not being able to afford normal things.”
“If you ask them why they’re not drawing down more of their pension than they currently are, they won’t tell you that it’s because they want to leave bequests to their children. They’ll tell you that it’s because they’re terrified of running out of money.”
To hear more from Julie Steed about the opportunities and challenges that could stem from the potential inclusion of SMSFs into the RIC, come along to the SMSF Adviser Technical Strategy Day 2024.
It will be held on the following dates:
Tuesday, 15 October, at Blackbird, Brisbane.
Tuesday, 22 October, at Rydges, Melbourne.
Thursday, 24 October, at Shangri-La, Sydney.
Click here to book your tickets and make sure you don’t miss out!
For more information, including agenda and speakers, click here.
This conference is produced by Captivate Events. If you need help planning your next event, email director Jim Hall at jim@captivateevents.com.au.
