Developing an Investment Strategy

Investment strategy - what to consider

An investment strategy is simply a plan for making, holding and realising fund investments that reflects the funds objectives (e.g. increasing the value of members’ interests) and circumstances. It is used as a means of pursuing one or more investment objectives and is rarely concerned with individual investments. Rather, an investment strategy should be concerned with asset classes.

To establish an investment strategy the following factors should be taken into account:

Develop a fund profile

A fund profile is a summary of the fund itself. It should identify the facts, the characteristics and the experience of the fund and its members. It should refer to the type of plan and how benefit entitlements are determined and paid, including fund reserves and insurance policies. It should also consider the profile of the funds membership, details of the current assets of the fund and its anticipated cash flow, by way of contributions and benefit payments.

Develop an investment objective

This is the goal that the trustees want to achieve. It can be expressed in a number of ways but it is fundamentally an indication of the type or amount of return that the fund is trying to achieve. The trustees may establish different investment objectives to be available for different members.

Set a strategy

Setting a strategy to achieve the investment objectives defines the means employed to achieve the stated returns. It should detail the types of assets that may be used to achieve the objectives and the actual ranges of asset allocations and benchmarks.

Monitor the objective & strategy

The trustees must regularly monitor the performance of the fund against stated objectives. This is the one area which trustees of DIY funds do not generally focus on. It is important to measure the fund's performance in light of its investment objectives and market conditions.

Communicate issues to members

It is a requirement of the SIS Regulations that detail of the investment objectives and strategies implemented are given to members [SIS Regulations 2.15 and 2.16]

Paying pensions from a SMSF fund

An increasingly popular reason for establishing SMSF is as a vehicle to provide a retirement income stream for the members of the fund. SMSF and SAF (Small APRA Superannuation Funds) may pay an allocated pension, complying pension, or other (non-complying) term pension.

A main advantage of using a SMSF fund to pay a pension is the continuity available for members - assets remain intact when the member moves into retirement so there is no need to rollover the benefit into an income stream product on meeting a condition of release, and no capital gains realisation.

In addition, providing pension benefits from a SMSF fund may provide valuable estate planning opportunities.

Allocated pensions are perhaps the most common type of pension paid from SMSF fund, providing for a market-linked account to be established to back a member's retirement income stream. As with allocated pensions offered by retail superannuation funds, a SMSF allocated pension may invest in a broad range of asset classes.

Since 1 July 2000, investment by an allocated pension in Australian equities has increased in tax-effectiveness, as any unused imputation credits arising from investments backing a pension will be refundable to the fund. Previously these credits were lost, unless the SMSF fund also had members still in the accumulation phase to be able to utilise the imputation credits.

Pensions and annuities that comply with requirements of the Superannuation Industry Supervision Act 1993 (SIS) enable members to access the pension RBL and possibly gain an exemption from the Age Pension Assets Test have strict conditions dealing with commutation and return of capital.

Capital which could normally be lost in certain circumstances (e.g. purchasing certain complying annuities/pensions) in a purchased income stream may be retained more effectively within the fund when it' is a SMSF or SAF.

A further advantage with using a SMSF fund to pay a complying pension is that the assets backing the pension need not be conservative. Public offer complying income streams are generally invested in more secure investments such as life insurance policies, bonds, debentures and other fixed interest securities. In SMSF the trustees retain full investment control and can take advantage of a more flexible investment approach, provided that appropriate actuarial certification is obtained. Both actuarial and audit certifications are required to ensure that the fund is able to meet its pension liabilities, the level of guaranteed pension payments are reasonable and the pension effectively meets the necessary pension and annuity standards.

The disadvantages in using SMSF funds to pay pensions include the increased paperwork and the complexity for members/ trustees of meeting their onerous responsibilities, dealing with tax compliance and maintaining proper bank accounts to facilitate pension payments. This is particularly the case as the members/ trustees age.

For more information about self-managed superannuation funds and to discuss the services we provide and how we can assist you to administer and manage your self-managed super fund, call us on 02 9884 8404 for a confidential risk-free consultation.

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