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How to choose investment allocation when switching superannuation funds?

Although the decision to leave a self-managed superannuation fund (SMSF) is not easy, the decision you make when it comes to investing the rollover will be just as important.

When you run an SMSF, you have total control over all investment decisions, which typically involve quite a large sum of money when combining a typical husband and wife balance.

You effectively hand back that control when exiting an SMSF structure. Whether you’re rolling over into an industry or retail fund, you need to fit within one of the available investment options. So what are the key things to consider when restructuring your superannuation investment strategy in a non-SMSF world?

You might find yourself in a position after retirement where the SMSF has run its course and you no longer feel confident that you have the skills or time to manage the pension fund. SMSF trustees in pension phase typically look to arrange the fund’s asset allocation so there are sufficient returns to cover the required living expenses without depleting the capital base.

Many SMSF pension members don’t actively look at ways of reducing volatility, with cash or term deposits being used as “defensive” asset classes to shield the portfolio from equity market shocks. In a low-interest environment, the “buffer effect” provided by cash and term deposits will be minimal in times of market dislocation.

Traditionally SMSF trustees drawing a pension have favoured Australian equities as a way of locking in a relatively high dividend payment or income return for their SMSF in order to cover living expenses and preserve capital. But SMSFs with a higher weighting to large-cap Australian shares also run the risk of higher volatility, with returns potentially swinging quite wildly between good and bad years.

As you get older, preserving capital also becomes more problematic as superannuation law compels you to take out higher pension amounts, typically higher than the fund’s investment return. If your SMSF pension asset classes revolve mostly around Australian equities and cash or term deposits, you might want to consider the non-SMSF world.

Consistent returns

One of the benefits of a non-SMSF investment pool is the level of diversification you can access, with holdings in direct property, private equity and infrastructure offering a valuable buffer if there is a correction in equity markets. A well-diversified portfolio with negatively correlated asset classes is designed to give a more consistent investment return, without the wild swings of a portfolio heavily focused on direct Australian equity.

But you have far less control over asset allocation when selecting an investment pool, and for those drawing a pension you need to understand the underlying targeted asset allocation. In the current environment of low returns for traditional defensive assets, you can easily find yourself in a “balanced” investment pool with an exposure to growth assets of over 80 per cent of the total value of the investment pool. This may well result in similar levels of volatility of investment returns to that of a heavily-weighted Australian equities portfolio.

While pension members might well be looking for a little less excitement when it comes to volatility in their portfolio, what about where an SMSF has both a pension member and accumulation member?

In most cases balances are combined for SMSF purposes, hence both members are exposed to the same investment strategy and asset allocation. This can lead to problems if the portfolio is heavily weighted towards growth assets or vice versa.

The movement away from an SMSF will allow both members to structure their own investment strategy so they can look to choose an investment pool more in line with their targeted return and volatility objectives.

Someone still in accumulation mode obviously has no desire for an income return and is focused on the growth of their portfolio, including the reinvestment of income. In a non-SMSF world, depending on the fund’s rules, accumulation members can dial up the growth exposure subject to defined maximum individual holding or asset class holdings. While not the same unfettered control you can enjoy with a SMSF, you can certainly structure your superannuation investment portfolio without worrying about the needs of other members.

When leaving your SMSF, make sure you take an active interest in the underlying asset allocation of the investment pools in your new superannuation fund. While handing over the investment control may be the best thing for your circumstances, you may well find yourself in a position that is not actually aligned with your investment performance expectations.


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