retirement income, superannuation, downsizer rules

You’ve put money in super …

… so what happens next?

In recent weeks, We’ve explained many of the new rules which allow those aged 55 or over to move significantly large sums of money into super.

But whilst there are good strategic reasons to do so, as well as possible tax savings to be made, the transfer of funds is not an end in itself. The job’s not done yet, as there are different ways you can make use of this money inside your super fund. It’s easy to think of super as a ‘thing’  or an end point destination. It’s not, it’s more properly understood as a financial structure, bound by certain rules. This structure allows you to actively manage your funds by making choices which are most appropriate to your age and life stage.

What does this mean?

Let’s assume you took advice and moved some money into your super fund.

It may have been from a property sale, a windfall gain, a salary bonus or a work entitlements payout.

What happens next is as important as the original decision to transfer, as your follow-on decisions can have a major impact on the growth of these assets.

But, as always, your options will depend on various different factors:

  • Are you in an accumulation or decumulation phase?
  • Have you reached Preservation Age?
  • Will you need money in the short term for income requirements, or to pay down a mortgage?
  • Or are you more interested in longer term growth?
  • Is your fund a Self-Managed Super Fund (SMSF), retail or industry fund?

There are no ‘one size suits all’ answers to the question of what you need to do next, nor is there a ‘set and forget’ strategy for any super fund member. There are, however, some useful questions to get you thinking about the best ways to deploy your funds within super and whether you have sufficient information to make the right decisions.

Diversification of funds within super

The fundamentals of the importance of diversification hold true for all superannuants, including those in SMSFs, retail or industry funds. Holding all your savings in one asset class is generally far riskier than spreading them across two, three or more forms of investment. Spreading your money across different investment types reduces risk by helping to negate the effect on your savings when one asset type performs poorly, e.g. low cash returns or a sudden drop in the sharemarket.

Common investment options include cash, fixed interest, Australian and international shares, infrastructure and property, but there are many more. There are also many ways of accessing these investment options including direct investment through to indexed funds. How your allocate your savings across the various options is an important aspect of your long term performance.

It may be, upon checking your super account, that you simply don’t understand the way your funds have been allocated or you don’t recall ever nominating an investment mix. you are not alone.  The vast majority of Australians do not make an active choice about how their super is invested. Typically they end up in the super fund’s default options.  These are usually pretty good but don’t always meet your needs and objectives.  It can help to talk to an Adviser if you are in this situation.  

Will you need to access funds in the short term?

It may be that you transferred extra savings into super in order to create a retirement income stream – typically an account-based pension, but also possibly an annuity or different type of pension. If so, you will need to identify the amount you wish to withdraw on a regular basis, and how long your funds will last with such regular withdrawals. Separately you may plan to use a lump sum withdrawal in the near future to pay down or pay off a mortgage. There are major Centrelink ramifications for both these actions, so it is important to fully understand the rules related to super limits and Centrelink allowances before proceeding.

Leaving money in for the long haul

You may be in the favourable position of not needing access to super funds for a few years yet. So maximum growth of these funds is the goal, and if so, it’s important to consider your risk settings.

How do you understand your risk appetite and what this means for your current age and stage

How to think about risk? Your risk profile is not confined to one attitude, but a combination informed by your experience and financial literacy, your capacity to recover from market downturns and your basic relationship with money.

You can find out more about risk and how to understand your own risk tolerance by using this easy questionnaire or talk to one of our advisers.

Other considerations

As is often the case when it comes to managing your retirement income, one thing leads to another and it can become necessary to juggle different sets of rules, such as Centrelink limits and thresholds, superannuation rules and tax implications. There is no easy answer nor quick solution to this need. The important thing is to fully acquaint yourself with the rules for all aspects of any planned money transfers well before you plan to shift funds. And if you’re in any doubt, to check that your understanding of the benefits of such transfers is correct for your own particular situation.

Making superannuation investment decisions involves a clear understanding of the reasons why you would move money to super and the many ways it can be used to further your savings within your fund. If you would like to test your thinking with a trusted adviser, why not make an appointment and let Retirement Essentials assist you to better understand your options?

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