Investments / Pensions / Professionals / SMSF / SMSF Strategy

Having your SMSF capitalise on a market recovery

The last month or so has seen the ASX recover strongly after a disastrous start to the new financial year.  Whilst we are well short of the ASX highs of mid-2007, we may start to see some further gains with some hopeful news emerging from Europe and other parts of the world.

As a result of this recent positive change, it is important from a strategic point of view, to start thinking about some of the key strategies that will bolster you or your client’s superannuation savings in a market recovery:

1. Boost the 10% pension limit with a Transition to Retirement ‘reboot’ – an effectively implemented transition to retirement strategy can add tens of thousands of dollars to a member’s retirement savings.  For some clients who regularly take a 10% maximum pension, recovering markets can provide the ability to roll back the existing income stream and reset the pension with a higher balance.  Conversely, if clients are looking to take the smallest pension possible, especially in light of the 25% reduced minimum for the 2011/12 financial year, now may be an opportune time to roll back their pension to accumulation to reduce the amount required to be taken for the financial year.

2. Locking in tax-free proportions – the use of recontribution strategies is still one of the most effective tools to build greater tax efficiency into income streams under age 60 and also for estate planning purposes.  The creation of multiple pensions with additional contributions or recontributions allows a member to potentially benefit from a higher tax-free proportion when drawing an income stream from the fund.  Subject to the level of pension taken each financial year, you can continue to grow the higher tax-free super balance when markets rebound.

In poor markets, there is some significant tax savings that can be obtained by rolling back pensions to accumulation phase (full commutation) to ‘absorb’ the negative returns against the member’s taxable component, rather than proportionately against their tax-free and taxable components.  At an appropriate time in response to recovering markets, the ability to recommence the pension allows for the member to lock in a higher tax-free component, saving tax on pensions taken prior to 60 and providing long-term benefits for non-dependant beneficiaries.

3. Have you considered segregation? – to further benefit the use of multiple pensions, trustees have the ability to segregate specific assets to different members, pools of members or different superannuation interests.  For example, by applying the fund’s growth assets to a member’s super interest with a 100% tax-free proportion, it can potentially:

  • accelerate the grow of the account balance;
  • provide a greater pension amount that can be withdrawn under a transition to retirement income stream; and
  • decrease the fund’s potential future exposure to death benefits tax for non-dependants.

Segregation may also be useful where the fund is not 100% in pension phase (i.e. one member in accumulation, one in pension).  It could be used to assist in the realisation of a particular asset which has risen significantly off a low cost-base.  By applying segregation, the particular asset(s) with a significant capital gain is fully exempt from tax, rather than partially exempt by having an unsegregated fund.  It is important that any segregation strategy is appropriately documented by the trustees to show specific assets being applied to a particular member, interest or pool of members.

4. Time to build reserves? –  Reserves within a self-managed super fund can play an important current day and longer term estate planning role.  For the majority of SMSFs, you typically see any positive returns applied towards each member’s balance.  However, it is important to consider whether to capture some of these positive earnings into fund reserves to look at implementing a range of strategies including future anti-detriment payments, self-insuring members, enabling future crediting of 100% tax-free pensions, etc.

Fund Reserves can play an integral role in any SMSF and are typically generated by earnings over time.  Planning to capitalise on recovering markets allows for SMSFs to implement many of these reserving strategies effectively.

These are just some strategies that you can start to plan with your clients to help bolster your client’s superannuation savings in recovering markets.



2 thoughts on “Having your SMSF capitalise on a market recovery

  1. I am not sure if Reserves is such a good idea for the following reasons

    1) If i am going to use re-contribution strategy, then reserves are useless for anti-detriment payments as there is no taxable component left in the account at the time of death – or in other words if i have reserves then i cannot complete my re-contribution strategy as the amount cannot be withdrawn by the member

    2) Reserves cannot stay in pension phase – so if i commence a pension with two members and have a substantial amount in reserves – then it is possible that 1/3 of the fund is in accumulation phase (reserve account). If my pension commences at age 55 and i die at say at age 85 – the tax paid by my reserve account will be quite a bit – even if i have a reserve account – my child who is 30 years my junior will be 55 at the time of my death and will have probably finished contributing to the fund. The possiblity is only for my grandchild contributing to the fund.

    But the income tax paid by reserve account for 30 years – say the reserve account is $1M and the income is say 6% or $60,000 each year – it is unlikely that the grandchildren (even 2) will have $60,000 of deductible contributions each year at age 25 at the time of my death will even have this money to contribute – if they were legally allowed to contribute that much.

    Since the likely hood of having grandchildren (daughters kids could be daughters – non-working home makers) making deductible contributions (which will not pay tax in your smsf) is so remote and paying tax from reserve account is so real which have to be paid each year (whilst you are alive) – i think experts should make comments with a qualification and full disclosure.

    I have seen many times parents who had reserve accounts – kids simply closed the fund after death after distribution to 6 kids and not to forget that running a smsf can be quite overwelming for some people.

    3) Finally, we are living in a world where only about 60,000 of the smsf are being administered by professional administration firms – there are about 400,000 of funds in the hands of suburbian accountants. With all due respect to them, your job should be first to teach them with the basics before we talk about advanced strategies.

    By basic i mean “advantages for spouse splitting” or commencing a “transition to retirement pensions” at age 55 etc..

    My suggestion would be to very careful when you suggest advisors or their clients as full disclosure and limitations of each strategy is clearly understood by them before implementation. And reserves in a SMSF is not for every fund…

    Manoj Abichandani
    SSA SSAud

    • Hi Manoj,

      Your comments are certainly valid to the extent that the use of reserves are a more sophisticated strategy to consider. With such a fragmented level of knowledge with those advising on SMSFs, you do certainly need to be aware of the benefits as much as the pitfalls. However, used appropriately, they can act as a very powerful vehicle for a range of strategies. They are not highly used and not for everybody, but many specialists in this area are starting to understand the benefits and pitfalls of using fund reserves.

      As you would be aware, this blog is designed to share my views and strategies. It is not personal advice, so any consideration of such strategies should also consider obtained specific advice from a specialist in this area.


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