Simple steps to save money in retirement with your SMSF

In this article we explain some options to save money and protect your nest egg once you enter retirement with your Self-Managed Superannuation Fund.

1. Review your Investments
2. Recontribution Strategy
3. Downsizing?
4. Administration Savings

Review your Investments

When life changes, your needs and goals change with them. The fund may need greater liquidity to pay pensions. With advice from your financial adviser, you should consider if your current investments remain appropriate.

For example, the fund can shift your SMSF investments towards income-producing assets, such as dividend-paying stocks, bonds, or rental properties. This can help ensure a reliable source of income during retirement, instead of potentially needing to sell growth-based investments at inopportune times to pay the members.

Another key consideration is that Australian franking credits normally remain refundable, even when the fund is not paying tax. For members in pension phase, this can result in an annual tax refund and cash boost to the fund in retirement.

Recontribution Strategy

Superannuation is very tax effective, except at death. There is effectively an inheritance tax on the taxable component of your fund’s balance, but there are ways to transfer your balances from taxable to tax-free through a recontribution strategy.

A recontribution strategy involves withdrawing money from the fund and depositing this back to fund as a non-concessional contribution. These increase the tax-free component of the fund. However, there are annual contribution caps, so the sooner this strategy is started once you are eligible, the more transfers are possible.

Example

John has a taxable SMSF component of $1.5 million. If this balance remains intact until his death, his adult children are taxed at 17%, or $255,000 of the balance!

Instead, John elects to use a recontribution and over the course of 14 years, he withdraws $110,000 annually (the cap), and contributes this back to the fund as a non-concessional contribution, saving his children $255,000 in taxes.

Downsizing?

If you are in or nearing retirement and planning to sell your home, you can consider contributing up to $300,000 from the sale of your home into your SMSF. Downsizer contributions are non-concessional and do not count towards the normal contribution caps. If this amount is placed into pension-mode, the investment earnings are tax exempt.

When considering this option, it is important to consider the total balance in your SMSF. Downsizer contributions still count towards your total transfer balance cap, the amount of money you can place into pension mode.

Administration Savings

Discovering savings on administration fees can be one of the easiest and most effective ways to increase retirement funds over the long haul. SMSFs often become simpler in retirement, and if an SMSF is paying the same for administration in pension mode as it did in accumulation, it may be an indicator that the SMSF administration should be reviewed.

Jeff and Amy operated a business and made contributions into their SMSF. For many years, their accountant completed the accounting for their business and SMSF. The SMSF administration fee of $3,500 seemed reasonable amongst the high turnover of the business.

Since then, Jeff and Amy sold the business and retired. Now that they rely on their savings and the income generated by their SMSF, they begin to look more closely at their administration costs and realised that could be paying significantly less. Given the standard nature of their fund, they qualified for Practical Systems Supers retiree offer of $1,800 per year.

Opting for this, they saved $1,700 per year in fees. If they reinvest this saving into their fund, at the ASX200’s average annual return rate of 9.3% over 10 years, they receive an extra $26,201 for their retirement.

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Disclaimer: The information provided in this article is general in nature and does not consider your personal circumstances, needs, objectives, or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from a qualified and licensed professional.