Building knowledge of the particular processes surrounding SMSFs will give you the confidence and insight on how to best manage your own fund. Perhaps the most important place to start is by illustrating the phases, or lifecycle of an SMSF, which relate to events and scenarios each individual, passes through at some point in their lifetime. In learning and understanding SMSFs we can then pinpoint areas you have a sound knowledge of, along with other areas that demand more attention so you can achieve the best results.
Anything worth doing obviously needs to start somewhere! Firstly, the person wanting to establish the SMSF must decide on who will assume the role of trustee(s) and devise a trust deed. Applicants must then complete the relevant paperwork through the ATO in order to establish themself as a superannuation entity. Upon completion, the applicant will then be officially recognised as a regulated super fund, after receiving the necessary TFN (tax file number) and ABN from the Australian Tax Office.
There are some underlying factors to consider, with each presenting decisions you will need to make beyond these steps and is explained in more detail on our How to create an SMSF page.
The basic notion of the accumulation phase involves facilitating the highest return on investment possible, while staying within the boundaries of your predetermined levels of acceptable risk and exposure to market volatility. This step practices the investment strategy you would have previously created, in order to guide you. During this phase in the lifecycle, funds are withdrawn to successfully fulfill the aforementioned estate plan, ensuring that funds are available to nominees in the event of death. Funds can also be withdrawn should the SMSF holder acquire a permanent disability, to take care of insurance costs, which are tax deductible to the SMSF.
This phase of the lifecycle relates to the point at which the fund owner can begin to withdraw funds from the account, usually occurring after the owner retires and has reached their natural preservation age. Other conditions that might need to be satisfied in order to release the funds pertain to:
- The holder reaches the age of 60 and has stopped working, OR
- Have reached age 65 and have begun receiving a pension from the SMSF.
- Acquired disabilities (permanent and temporary).
- Intentions to start withdrawing funds after reaching preservation age (55) and wanting to withdraw a ‘transition to retirement’ pension. Fund owners can still work in this scenario.
- Investing back into the SMSF during pension phase.
The investment strategy adopted in earlier stages will now be replaced by a new strategy to comfortably fund the ongoing pension, while hopefully leaving growth options and mobility to compensate for external events such as inflation. In order to ensure that payments received from your pension remain at a consistent level, the strategic priority and intent now becomes one of safety and low-risk.
When the designated SMSF owner dies, the account can be pre-nominated to other trustees, should they have the capacity and desire to do so. Therein lies the problem. The estate plan left by the previous owner may, in itself, encourage or discourage other nominated trustees to continue the fund for future generations.
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