COVID-19 will force trustees to readjust their investment and administrative strategies for the new financial year.

The COVID-19 pandemic has affected everyone, and Self-Managed Superannuation Fund (SMSF) trustees are no exception as they try to navigate the impact of the continuing economic uncertainty and market volatility on their retirement savings. 

Although the worst of the pandemic is (hopefully) behind us, trustees still have difficult questions to ponder as they focus on how best to position their SMSF in 2020-21, as well as meet their annual regulatory obligations for 2019-20.

There are no easy answers. Economists are deeply divided on the nature of any economic recovery. How soon? How strong? For trustees, it means being focussed, with many needing to get specialist advice, perhaps for the first time, as they seek to preserve their capital and, in the case of retirees, be able to meet their regulatory pension payments. 

But it is not all about investment decisions, important as they are. The following are five issues trustees will need to grapple with in the months ahead.

1. Investment strategy

One of the many benefits of having an SMSF is that when investment markets are turbulent, trustees can react quickly to reposition their portfolio’s asset allocation. This is a key consideration on the cusp of 2020-21. 

It is important to understand that an SMSF’s investment objectives and strategy are not set in stone, with the strategy needing to be reviewed at least once a year and signed off by an auditor. Indeed, it is a legal obligation. 

An SMSF investment strategy must consider the following: 

• The risks involved in making, holding and realising investments, the expected return and the cash-flow requirements;
• The diversification and composition of investments;
• The liquidity of the investments, having regard to expected cash-flow requirements;
• The ability to pay current and future liabilities, including benefits to members; 
• Whether to hold insurance cover for each SMSF member.

Before any investment decision is implemented, particularly in a COVID-19 environment, trustees should examine the impact of the virus on the overall portfolio to ensure they are investing in line with their strategy. 

2. Looking beyond a dividend focus

SMSFs are an attractive retirement savings vehicle for the control and flexibility they provide. At the end of the 2019 calendar year, SMSFs had 20 per cent of their $750 billion of funds under management in cash and term deposits – a handy buffer for what was to come. By contrast, their exposure to illiquid private-equity assets, for example, was minimal.

SMSF investors have been typically attracted to blue-chip stocks paying fully franked dividends. Post the GFC, it was a policy that served them well. Buying companies paying fully franked dividends became the accepted investment norm for many trustees. But many companies are now cutting or deferring dividends, and they may not return to the levels of the 2018-19 financial year for many years.

SMSF trustees must consider focussing less on dividends and more on capital growth. High allocation to the big banks is a perfect example of over-exposed dividend investing, in my view. Consideration must be given to portfolio allocations that provide a sufficient level of growth, given healthy dividends are no longer a fait accompli.

To accompany this consideration, trustees should think about their retirement incomes, not just for the income they receive from assets but in the utilisation of capital. 

They should recognise that accumulated superannuation capital is designed to be utilised – to be drawn down to fund retirement incomes. It is not intended as a nest egg for the children and grandchildren.

3. Meeting new pension requirements

To help manage the economic impact of COVID-19, the Government has reduced the minimum drawdown requirements by half on common pensions, such as account-based pensions and market-linked pensions, for 2019-20 and 2020-21. This also occurred after the GFC in 2008, and trustees will need to consider and amend their pension strategies for these two financial years.  

This includes ensuring the minimum pension has been paid for this financial year. Where this requirement is not met, SMSFs will be subject to 15 per cent tax on pension investments instead of being tax free. 

Where trustees have been receiving regular pension payments, it is likely they may have received more than the required minimum payment for this year. Unless trustees meet contribution eligibility rules, these funds cannot be returned.

 It is also important for trustees to amend their pension strategies for 2020-21 to reflect the “new” minimum pension standards. Specialist SMSF advice may be needed to help trustees determine the most effective way to structure benefit payments. 

4. Property

For those exposed to property, in some cases with a limited recourse borrowing arrangement (LRBA), there are new considerations.  

Many SMSF commercial properties (and, to a lesser extent, residential property) will not be receiving full rental payments under their lease agreements because of COVID-19, meaning less income.

The unprecedented legal requirements imposed on some landlords to receive less rent to assist their tenants experiencing material hardship is something no investor could have foreseen. But now it is a reality and trustees must adjust accordingly.

All efforts should be focussed on negotiating with tenants and using the Government support packages to hopefully ensure both landlords and tenants will be able to withstand the effects of COVID-19. This includes considering the property relief measures the ATO has implemented and the use of the National Cabinet’s Mandatory Rental Code to plan rental income for this and next financial year. 

5. Contribution changes

Before 30 June, SMSF trustees should review their contribution strategies to ensure they have contributed what they intended to and are below the transfer balance caps. 

Non-concessional (after-tax) contributions are limited to $100,000 for the 2019 financial year and concessional (before-tax) contributions are limited to $25,000. These will remain the same for 2020-21. 

However, SMSF trustees should be aware of the legislation slated to pass before the end of the financial year. If passed, it will allow people aged between 65 and 66 to make voluntary contributions (previously restricted to people below 65) without meeting a work test. 

These older individuals will also be able to make up to three years of non-concessional superannuation contributions under the bring-forward rule, so it will pay to get advice to maximise their contributions.

Conclusion

No one saw COVID-19 coming. Australia has done well to stop its spread and minimise the fatalities to just over 100. But it has come at great economic cost that will force SMSF trustees to readjust their investment and administrative strategies, not just to 30 June 2021 but for some years to come.

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