Adding another, younger, person to your self-managed super fund is not as complex as it sounds and aside from extending the life of the fund, there are other benefits too.
By Michael Mekhitarian
There are good reasons to consider bringing a younger person into your self-managed super fund, (SMSF) not least of all is the fact that it can extend the life of the fund well beyond its current expectancy.
But, I’ll be straight up: This is not the right strategy for every SMSF, however it is worthwhile considering, because it can be beneficial in numerous ways.
Firstly, there’s the cash injection. Bringing in a new, younger, member who has potentially many more working years ahead of them gives your SMSF more funds because you’re directing an additional minimum of 9.5% of their salary each year into the fund. This can help with managing debt and other ongoing expenses, taking the pressure off cash flow.
This extra money can also assist the SMSF in funding retirement pensions for older members who have already, or are in the process of, transitioning to retirement.
The key to whether this strategy works depends on how member balances are treated. This is how many of the larger funds operate – they maintain and manage their assets and are still able to pay out pensions.
Having additional financial contributions from a new member can also open up a wider variety of opportunities for greater diversification within the current investment portfolio.
One specific area where this might be beneficial is purchasing property. Because banks have tightened lending criteria, introducing a new member, and therefore having more funds in the total SMSF pool, could make the fund more attractive to lenders because it improves your ability to service a loan.
Of course, a new member will also bring a fresh perspective to the current portfolio … and change can be good if it’s managed wisely.
It can also be advantageous when a child or younger relative joins the family business and the business premises are owned by the SMSF – transition to the next generation is simpler.
Another consideration of course is that a younger person may be able to take over the management reigns of the SMSF as older members look to step down, work part-time, or retire completely.
For the new member there are also advantages, including the fact that they’re taking an active interest and a ‘hands on’ role in managing the fund, which is their superfund too.
It’s an opportunity to learn a different set of financial and investment skills and gives them more of a ‘vested interest’ in the business, encouraging loyalty and longevity of employment.
Of course, there are pros and cons with every decision, and every SMSF is different. It’s absolutely vital that existing SMSF members debate all the issues at length to ensure they are comfortable with introducing a new member, and that it’s beneficial for the fund overall.
Risks versus the benefits need to be weighed carefully, and it’s a decision that shouldn’t be rushed.
It’s also important to conduct all the appropriate checks and balances on the new member, to ensure they’re the right person to bring in. It’s vital that the new member is equipped and informed enough to take on the responsibilities that may lie ahead if the succession plan involves this person eventually taking over the management of the fund.
SMSF funds can now have up to six members. It is relatively simple to add a new member to your SMSF, not so simple to undo, so every member within the SMSF needs to be comfortable with the decision. The SMSF must have minuted all of the discussions and ensuing agreements. Declarations need to be signed. You must also inform the ATO.
It’s important to remember that the sole purpose of the SMSF is to fund retirement, and any decisions should be made with this simple objective in mind.
It’s also important to remember that SMSFs are governed by complex legislation and there have been significant changes in recent years. Compliance with these regulations is critical at every step, and the best way forward is to get professional advice.
And if you make changes, then check that you have the right insurance in place.
If we can help you structure or make changes to your SMSF, then please, contact us.
This is general advice only and should not be treated as personal advice.
Always seek professional advice that consider your personal needs when making financial or investment decisions or changes to your SMSF.