Regular updates to your SMSF investment strategy allow for you to accommodate market conditions, significant events or changes to the fund’s structure and reduce their impact on your SMSFs growth.
Your self-managed super fund’s investment strategy should not be a ‘set and forget’ document, particularly now.
The members of your SMSF should review your strategy regularly to ensure it continues to meet the current and future needs of your members, depending on their circumstances.
Certain significant events should also prompt you to review your strategy, such as:
- a market correction
- when a new member joins the fund or departs a fund
- when a member commences receiving a pension, this ensures the fund has sufficient liquid assets and cash flow to meet minimum pension payments before 30 June each year.
Your strategy needs to be reviewed each year, with documentation that the review has been undertaken and any decisions made from the review noted.
Your SMSF investment strategy should be in writing. It should also be tailored and specific to the relevant circumstances of your fund rather than a document that just repeats the words in the legislation.
Relevant circumstances may include (but are not limited to) the personal circumstances of the members such as their age, employment status, and retirement needs, which influence your risk appetite. Your strategy should explain how your investments meet each member’s retirement objectives.
In particular, under the super laws, your strategy must consider the following specific factors regarding the whole circumstances of your fund:
- risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements
- composition of your fund’s investments, including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification
- liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses)
- fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs
- whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.
Super laws also require you to invest following the best financial interest of all members. You need to be aware of any legal risks that may result from investing in one asset class.
Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your strategy should document:
- that you considered the risks associated with a lack of diversification
- how you still think the investment will meet your fund’s investment objectives, including your return objectives and cash flow requirements.
Creating an investment strategy that can stand up to the ATO’s scrutiny may require the assistance of professionals who understand the intricacies of the documents. Come start a conversation with us so we can help point you in the right direction.