SMSF trustees need to look beyond share dividends and property as their major income sources in retirement and pivot towards growth assets or even selling down investments, according to the SMSF Association.
In a column published on the industry body’s trustee-focused website, SMSF policy manager Franco Morelli said while SMSFs were better situated to ride out the COVID-19 economic downturn, the returns from shares and property were unlikely to be as high for at least the next year.
Morelli noted the preference for domestic equities, to secure fully refundable franking credits, and cash investments had placed SMSFs in a good position for the COVID-19-driven downturn and “many SMSFs should be able to navigate through this pandemic from a better starting point than some of their counterparts who are in a large superannuation fund”.
This would be possible because at the end of 2019 SMSFs had 20 per cent of their $750 billion in funds under management in cash and term deposits, but the current recession meant trustees would need to reconsider their asset allocation, diversification and liquidity.
“Equities are extremely volatile, interest rates are at record lows and property is likely to be facing a stifled falling market. This is creating a mountain of uncertainty on asset values, dividends and rentals. So SMSF trustees should change their thinking in a way they possibly have not done before,” Morelli said.
He said the consistent history of large companies paying high dividends had become ingrained thinking when considering equity returns, but this was unlikely to continue in a recession and the major companies, including the banks, were already deferring or reducing dividend payments.
“The first change for SMSF trustees to consider when talking about asset allocation is to focus less on dividends and more on growth in the investment equation. Consideration needs to be given to allocations that provide a level of growth assets to cover for the fact that high levels of dividends are no longer a fait accompli,” he noted.
He said retirees should also consider selling assets to use the capital they have accrued to fund their retirement, rather than relying only on income-generating assets.
“SMSF trustees should recognise that accumulated superannuation capital is designed to be utilised – to be drawn down to fund retirement incomes. “Currently, many individuals risk underutilising their retirement savings because of the uncertainty about their future lifespan and a resultant bias towards capital preservation,” he said.
He pointed out similar asset concentration risk and liquidity issues occur with property investments and many commercial properties held within an SMSF will not receive the full level of rent within their lease agreements as a result of COVID-19 measures.
“Liquidity issues are also amplified because of the indivisibility of property compared with more liquid investments such as cash, shares or bonds,” he noted.
“Going forward, trustees, especially those in retirement phase, should think deeper about the risks posed by large allocations to property when they are used to fund pensions.”
In making these changes, he pointed out trustees had been pushed in this direction during 2019 when the ATO wrote to 17,700 SMSF trustees about portfolio diversification, adding “many in the industry thought the regulator was overstepping the mark. Now the ATO looks like a prophet”.
“Few people could have predicted a global health pandemic and even fewer could have predicted the resultant economic impacts,” he said.
“Despite the fact the ATO admitted its communication about who the letter was sent to could have been improved … the conversations that have occurred post receipt are now hopefully paying dividends.”
