Ready to retire? 5 tips for SMSF members

Once you’re ready to retire, or start drawing a pension while you wind back your work hours, you need to switch part or all your SMSF’s focus from growth to providing income. This can involve many complex decisions that have significant implications.

So even if you’ve always been a self-directed investor, it’s worth engaging a financial adviser to guide you through this transition.

Kris Kitto, Founder of SMSF administrator Grow SMSF, says it can be very difficult for retirees to find the right balance so they’re not too conservative with their retirement savings while also not living beyond their means.

“I tend to see a lot of older members keep more in super than they need to, and that’s why it’s worth getting advice,” he says.

It’s never too soon to start planning for your retirement strategy, as many of the decisions you make during your SMSF’s establishment and ongoing management could affect your options in the future.

Here are five things to consider.

1. Check you meet retirement criteria

The most common pension paid by SMSFs is an account-based pension, which is an income stream paid from a super account held in the member's name. This offers investment flexibility, access to remaining capital and flexibility to choose the total income you receive from the fund each year (subject to the minimum payment requirements).

Before you can start receiving an account-based pension via your SMSF, you need to meet a condition of release.

The most common conditions of release are:

• retirement, after reaching your preservation age (which is age 60 if you were born after 30 June 1964)
• reaching age 65 or
• permanent incapacity.

You should review your SMSF’s trust deed to ensure it allows for account-based pension payments.

Then, make sure you’re comfortable drawing down the minimum payment amount each financial year. Your fund’s earnings in pension phase are only tax-free if you meet this criteria. See the ATO website to calculate your minimum payment, which is based on your age.

2. Tailor your investment strategy for different retirement horizons

SMSFs give you the flexibility to enable different retirement strategies for individual members. For example, it's quite likely one SMSF member will choose to retire before the other.

“SMSFs are very flexible, and it’s common to have one member partially or fully in pension phase, and another member still accumulating,” explains Kitto. “It’s actually a relatively simple process. The SMSF can be apportioned, so a set amount covers the pension and can generate tax-exempt income, while the rest can be directed to accumulation investment strategies and be taxed accordingly.”

3. Reallocate cash for unexpected expenses

Your SMSF bank account’s role will shift once you go into retirement phase. It will start making regular payments from your account-based pension or be the source for a lump sum payment.

Olivia McArdle, Head of Payments and Deposits with Macquarie Bank, says it’s important to still keep the SMSF bank account separate from your everyday personal transaction account.

“You might want to set up a high-interest transaction savings account with a debit card, and link it to your cash hub,” she says.

It’s also important to recognise your spending habits will change during different stages of retirement. Having some cash on call in your SMSF cash hub can enable lump sum withdrawals, subject to regulation, to fund travel plans or medical care. “Make sure you have liquid investments available for unexpected expenses later in life, and that you can move funds around easily when you need to,” McArdle adds.