Key Issues
Investment strategy - what to consider
An investment strategy is simply a plan for making, holding and realising fund investments that reflects the funds objectives ( eg. increasing the value of members interests ) and circumstances. It is used as a means of pursuing one or more investment objectives and is rarely concerned with individual investments. Rather, an investment strategy should be concerned with asset classes.
In establishing an investment strategy the following major factors should be taken into account:
Develop a fund profile
A fund profile is a summary of the fund itself. It should identify the facts, the charachteristics and the experience of the fund and its members. It should refer to the type of plan and how benefit entitlements are determined and paid, including and reserving and insurance policies. It should also consider the profile of the funds membership, details of the current assets of the fund and its anticipated cash flow, by way of contributions and benefit payments.
Develop investment objective
Develop investment objectives - this is the goal that the trustee wants to acheive. It can be expressed in a number of ways but it is normally some indication of the type or amount of return that the fund is trying to acheive. The trustee may establish different investment objectives to be available for different members.
Set a strategy
Set a strategy to acheive the investment objectives - this is the means employed to acheive the stated investment objective. It should detail the types of assets that may be used to acheive the objectives and the actual asset allocation ranges and benchmarks.
Monitor the objective & strategy
Monitor the objectives and strategy - the trustee must regularly monitor the performance of the fund against stated obgectives. This is the one area which trustees of DIY funds do not generally focus on. It is important to measure the fund's performance in light of its investment objective and market conditions.
Communicate issues to members
Communicate issues to members - it is a requirement of the SIS Regulations that details off the investment objectives and strategy are given to members [ SIS Regulations 2.15 and 2.16 ]
Paying pensions from a SMSF or DIY fund
An increasingly popular reason for the establishment of SMSF funds is as a vehicle to provide a retirement income stream for the members of the fund. SMSF's and SAF's ( Small APRA Superannuation Funds ) may pay an allocated pension, complying pension, or other ( non complying ) term or lifetime pension.
A main adavantge of using a SMSF fund to pay a pension is the continuity available for memebers - assets remain intact whenthe member moves into retirement so there is no need to rollover the benefit to an income stream product on meeting a condition of release.
In addition, providing pension benefits from a SMSF fund may provide valuable estate planning opportunities.
Allocated pensions are perhaps the most common type of pension paid from SMSF fund, providing for a market - linked account to be established to back a member's retirement income stream. As with allocated pensions offered by retail superannuation funds, a SMSF allaocated pension may invest in a braod range of asset classes.
Since 1 July 2000, investment by an allocated pension in Australian equities has increased in tax - effectiveness, as any unused imputation credits arising from investments backing a pension will be refundable to the fund. Previously these credits were lost, unless the SMSF fund also had members still in the accumulation phase to be able to utilise the imputation credits.
Pensions and annuities that comply with requirements of the Superannuation Industry Supervision Act 1993 ( SIS ) enable members to access the pension RBL and possibly gain an exemption from the Age Pension Assets Test have strict conditions dealing with commutation and return of capital.
Capital which could normally be lost in certain circumstances ( e.g. purchasing certain complying annuities / pensions ) in a purchased income stream may be retained more effectively within the fund when it's a SMSF or SAF.
A further advantage with using a SMSF fund to pay a complying pension is that the assets backing the pension need not be conservative. Public offer complying income streams are generally invested in more secure investments such as life insurance policies, bonds, debentures and other fixed interest securities. In SMSF funs the trustee retains full investment control and can take advantage of a more flexible investment approach, provided that appropriate acturarial certification is obtained. Both acturarial and audit certification is required to ensure that the fund is able to meet its pension liabilities, the level of guaranteed pension payments are reasonable and the pension meets the necessary pension and annuity standards.
The disadvantages in using SMSF funds to pay pensions include the increased paperworkand complexity for the members / trustees, eg. dealing with tax compliance and maintaing bank accounts to facilitate pension payments. Tis is particularly the case as the members / trustees age.
