The DIY pre-retirement garage sale

Trustees are tending to sell their SMSF property pre-retirement to cash up.

PORTFOLIO POINT: Numbers on post-retirement asset switching show SMSF retirees actually do de-risk their portfolios as they age.

The shift from being a part of the workforce to being retired is a momentous decision in the life of anyone.

Some cope with the transition really well. Others don’t. Most, as I wrote about here (December 15, 2010), wish they’d hung around a little longer in the workforce for various reasons.

And we’re told that our investments should, as we age, become less aggressive. More of our money should be in defensive investments (cash and fixed interest) over growth assets (property and shares).

However, for those in APRA-regulated funds, this is something that may not actually happen. Unless people are taking an active interest in their managed-fund super, they are, in all likelihood, sitting in the same balanced fund they have had their super in for the better part of several decades.

But not SMSF trustees. Oh no. You do make significant changes to your investments in retirement. And rarely have I seen this better illustrated than in a recent piece of research from asset consultants Rice Warner.

The survey, paid for by index fund manager Vanguard, and completed via connections to members of the Self-Managed Superannuation Professionals Association of Australia (SPAA), shows that SMSF retirees do make big changes to their asset allocation in retirement.

The most startling findings in the survey (for me) was the sell-down of commercial property and the increase in cash holdings for “pre-retirees” versus “retirees”.

Prior to retirement, these two assets made up 35% of all holdings of SMSFs. In the pre-retiree segment, that was split 22% cash and 13% commercial property.

Post retirement, those two asset classes still make up exactly 35% of retirement assets. However, after “slowing down”, it changes to 33% cash and just 2% commercial property.

Commercial property, or business real property, has long been a favourite of SMSFs. It has often been a primary reason for setting up a SMSF. The small business owner, who wants to hold the premises out of which their commercial property operates, has always been able to do so through a SMSF.

And, unlike residential property, a SMSF can purchase a commercial property from a related party. That is, the small business person, or the business itself, can “sell” the business real property to the SMSF. (You cannot sell, or transfer, residential property from your personal name to your SMSF).

The business real property holding serves its purpose during the working years. But when exiting the business to make way for retirement, the property also, predominantly, is sold. And the money, it would appear, gets turned into cash.

Interestingly, residential property also gets sold off. It makes up 9% of holdings prior to retirement, but just 5% after retirement.

Other changes to the risk-weighting of assets is not as prevalent as these two areas.

Overall, those who are invested in “growth” or “high growth” overall investment styles falls from about 46% during the working years to about 27% in retirement. Those who are invested more conservatively, or all cash, lifts from about 14% to about 28%. Those with a “balanced” style to their investments moves from 40% to approximately 45%.

There’s a definite decrease in quantum invested in risk assets as compared to defensive assets.

SMSFs still hold an average of 40% Australian shares both before and after retirement. Most other investment asset classes shift by around 1%, including unlisted trusts, ASX-listed trusts and collectibles.

Government meddling

Rice Warner’s statistics were illuminating elsewhere also. You are more concerned about the impacts of further government changes to superannuation rules than you are of another crash in the markets.

Approximately 83% of respondents are concerned about government meddling in the super arena. However, only 68% listed the risk of a major fall in investment markets as a significant risk to their retirement wellbeing.

Just 34% said that the GFC had impacted on their retirement plans. If the biggest crash in modern history didn’t affect the retirement of two-thirds of respondents, then it shows the real strength of concern about further changes to government policy on superannuation.

“Many are not happy with the reduction to the contribution caps for concessional (pre-tax) contributions,” the report said.

“Some of them even named government ministers,” Rice Warner founder Michael Rice told The Australian.

In sickness and in health ...

What you believe you’ll be spending your money on in retirement is, in one light, quite humorous, though probably understandable.

In retirement, you expect to be worse looking, sicker and more sober. But at least you expect to be doing that somewhere away from home.

More precisely, you’re going to let your appearances slip (massive spending cuts are anticipated on “clothing and personal care”), you’ll expect to spend less on “sin” taxes (lower consumption of alcohol and cigarettes), you expect to be less healthy (greater medical expenses), yet still be okay to travel a bit more.

I’m not sure how much fun that whole scenario sounds.

Compulsory annuities

The prospect of a government insisting that superannuants take a portion of their super as an annuity has little support.

In this column (Living today, paying tomorrow: A super dilemma), I pointed out that the likelihood of compulsory annuities is probably increasing, particularly if Australians have wised up to the fact that they can spend an extra $70,000 pre-retirement, because they’ll be able to pay that out in full by getting hold of their super at retirement.

Two-thirds of respondents said they didn’t want the government to make annuities compulsory. Few said they had them currently, and most said they would not purchase them even if they were more freely available and better value.

Super’s granddaddy weighs in ...

On a subject closely related to annuities, it was interesting to see former Prime Minister Paul Keating back into the superannuation debate again. Eureka Congress participants were lucky enough to see Mr Keating espouse plenty on some of his favourite super and economic topics in June.

But it seems that 2012 is the year that Mr Keating has decided that he’s sick of seeing the superannuation system he was kicked around.

Mr Keating wants to see money set aside, by governments or under the control of governments, for those who are living ultra-long term. He also wants to see annuities made compulsory.

Australia’s compulsory superannuation guarantee system is due to go from 9% to 12% between now and July 2019.

That’s not far enough, says Paul. He wants to see another 3% put into government hands to fund “Superannuation Phase II” that kicks in from age 80 to, roughly, 100, to fund what he calls a “longevity insurance fund”.

As he’s said previously, he believes the decision to cut the concessional contribution rate from $100,000-plus to just $25,000 is a mistake and he’d like to see it raised again. He was critical of his party’s decisions in these areas.

There would be little argument from Eureka Report readers.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E:

Graph for The DIY pre-retirement garage sale

The Inspector-General of Taxation has launched three investigations into the ATO treatment of taxpayers, including how excess contributions are penalised. A statement from the IGT said despite the one-off refund program for excess contributions being introduced, submissions continued to show concerns about a range of issues, including “inadequate consideration of taxpayer-provided information” and “assessments effectively penalising taxpayers for breaching the contributions caps in circumstances beyond the taxpayer’s control”. Submissions to assist the review are due by December 18, and more information on all of the IGT investigations can be found here.

Limited Recourse Borrowing Arrangements, or LRBA’s, remained in the spotlight for self-managed fund investors and commentators this week. The arrangements, which allow SMSFs to borrow for the purchase of “single acquirable assets” under certain restrictions, were the focus of an Australian Taxation Office warning recently and Bruce Brammall’s article last week. However property is not the only area these arrangements can apply, and the ATO recently also answered questions on share ownership. SMSF Academy head Aaron Dunn writes: “It’s not uncommon when placing an order of shares that there may be insufficient volume at a particular price to acquire shares or units… This results in the single order being ‘filled’ over multiple share prices or even different dates.” However Dunn writes that the tax office has made clear these short delays in ‘single order’ instances would not be a problem.

The ATO has reminded trustees of newly registered self-managed funds that annual returns are due by February 28. The Tax Office says this deadline only applies to those lodging through a tax agent, and self-prepared returns were due by October 31. “To meet the lodgement deadline, make sure you allow enough time to have your financial accounts and statements audited,” the ATO says.

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