Paying a pension in a super fund can be hard work, so much so that you may be forgiven for feeling like you’re running a small business. So, today I’m going to give you a few tips to make the job a bit easier.
Perhaps a good place to begin is to consider what a pension actually is. The modern description of a pension is that it’s a vehicle for paying regular income over an indefinite period of time, generally to allow the pensioner to maintain their lifestyle without working.
Paying a pension is very similar to running a small business. Yes, technically, a super fund is a special type of trust and therefore not a business. However, all businesses, and small businesses in particular, survive on their ability to manage their cash flow. Cash flow is king, as the saying goes, and without adequate cash flow, a business will go broke. Similarly, without adequate cash flow, your pension will simply run out of assets – and I’m sure that’s something you want to avoid.
So let’s look at several ideas that will help you manage your affairs:
1. What are your cash flow needs?
There are two issues here: how much income you need to live on; and how much net income your pension can generate.
By net income I mean the income earned after all expenses – taxes, supervisory levy, accounting, bookkeeping, audit and advice fees. If the income you’re earning is not enough to cover these expenses as well as your pension income (which must meet the statutory minimum requirement), then you might need to consider selling assets to pay your pension. But which assets and why?
Ideally, you don’t want to be forced to sell assets quickly. We all know panic selling is the worst time to be looking for a buyer for our assets. So to avoid this, I suggest you create a cash flow plan that looks five to 10 years ahead. Your plan should include which assets you’d like to sell first and when you’d like to sell them. You should review this plan every six months or so because, as we’ve seen this week, financial markets change rapidly.
2. Stress test your super fund’s budget
What happens if the value of your SMSF’s assets falls (think GFC and recent market gyrations)? Will your fund still be able to generate the income it needs to pay your pension? Play around with how you could respond to different market scenarios.
3. Lumpy assets
A large single, or ‘lumpy’, asset in your super fund – such as property – can sometimes cause a major problem when paying a pension. What happens if there’s no tenant or lessee for some time? Or if there’s insufficient income from the investment to pay fund expenses and your pension income? In these situations you may be forced to sell the asset quickly and at a discounted price.
4. Don’t pay yourself units
One of the worst ways to design a pension is to use units because you’ll have to redeem them whenever you want to pay an income. This means you’re always playing around with your assets.
5. Have an asset buffer
One way to make your retirement assets last longer is to put aside rainy day money – say 10% to 15% of your assets. This could be used help you recover from a lousy market performance or help preserve your money into old age. I’ll have more to say about this in next week’s Switzer Super Report.
6. Don’t forget Centrelink
If Centrelink assesses you under its assets test, remember that whenever your assets fall in value, your Centrelink income will increase. This can act as an extremely handy buffer when markets are moving in the wrong direction.
The issues I’ve raised here should be taken into account when you design your super fund’s investment strategy. It’s best to make sure this strategy is written down and stored with your trustee documents. You can find more information on how to design a strategy, and take a look at an example, on our website under Creating an investment strategy.
Also in the latest Switzer Super Report:
- Peter Switzer: I see strong positives beyond the fear
- Charlie Aitken: My three stock picks for a misbehaving stockmarket
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
