If your self-managed super fund (SMSF) has members that are in (or will soon begin) the pension phase, then it’s important for your SMSF investments to be sufficiently liquid.
The recent surge in property prices across Australia has made it more attractive for SMSFs to invest in property. However, property is not a liquid investment like shares that can be easily converted to cash if or when the need arises (such as when a member enters the pension phase or dies).
This fact makes it crucial for SMSFs to consider whether a significant holding of property investments is an appropriate investment strategy for members’ needs.
Reviewing your investment strategy
Your SMSF must have a documented investment strategy that complies with your SMSF trust deed to be compliant with Australia’s superannuation laws. As a trustee of your SMSF, you also have a legal obligation to regularly review your investment strategy to make sure it meets members’ current and future needs.
You should review your investment strategy every few years, or when any of the following situations occur:
- – there is a significant market correction (e.g. a major share market crash).
- – a member leaves your SMSF (e.g. if a member dies and is paid out their death benefit).
- – a new member joins your SMSF.
- – a member of your SMSF enters the pension phase. It’s important to understand that any member in this phase withdraws a minimum pension amount each financial year for your fund to remain legally compliant.
Minimum annual super pension payments
Current minimum annual pension payment amounts for the 2021/22 financial year are outlined in the table below. They vary based on the pension recipient’s age.
(% of account balance)
|95 or more||7%|
It is therefore important to ensure that your SMSF has sufficient liquidity to meet these minimum annual payment requirements.
Using an offset account to maintain SMSF liquidity
If you have (or want) an SMSF property investment loan and you need (or want) to hold funds for liquidity reasons, then an offset account may be right for you.
An offset account is an account that’s linked to a loan. The balance of this account is readily available, but it also helps you to reduce the amount of loan interest that you pay. The balance of the offset account is deducted from your loan balance for interest calculation purposes.
For example, if you owe $400,000 on your SMSF property loan but have $100,000 in your offset account, then you will only be charged interest on $300,000 (i.e. $400,000 less $100,000).
The offset account not only allows you to have $100,000 liquidity in your SMSF, it also effectively earns (saves) you the amount of interest you would be charged on an extra $100,000 on your property loan. This saving is higher than the amount you would be able to earn with a regular savings account, as the interest rate charged on a mortgage is always higher than the interest rate given in a savings account.
The bottom line
Ensuring both the liquidity and legal compliance of your SMSF is crucial. If you need to keep cash available for pension payments, an offset account might be right for you.