Every self-managed super fund (SMSF) must have an investment strategy, and superannuation law requires trustees to formulate it, review it regularly, and give effect to it, having regard to the whole of the circumstances of the fund. Reviewing your SMSF investment strategy is not a tick-a-box exercise. It is how you make sure the fund’s assets still match the members’ retirement needs, and it is one of the things your auditor will check each year.
The law does not set a fixed timeframe for what “review regularly” means. It is widely accepted, and consistent with the ATO’s expectations, that the review should happen at least once a year. This guide explains how often to review your investment strategy, what the strategy must cover, and how to document it so your fund stays compliant.
Why Review Your SMSF Investment Strategy?
Superannuation law requires SMSF trustees to formulate, regularly review, and give effect to an investment strategy for the fund. The obligation is ongoing, not a one-off task completed when the fund is set up.
Whichever way you approach it, you need to be able to show your fund’s auditor that you have reviewed the investment strategy and documented any decisions made. That documentation should record either the changes you decided were necessary, or your conclusion that the existing strategy remains appropriate. Without that evidence, the review effectively did not happen as far as the audit is concerned.
How Often Should an SMSF Investment Strategy Be Reviewed?
At a minimum, the review should take place at least annually.
Some trustees carry out the review leading up to, or at the start of, a new financial year. Others do it as part of reviewing the completed financial accounts from the previous year. Neither approach is right or wrong, and you should consider what suits your situation. The important point is that the review is done and documented each year, ready for the auditor.
When Else Should You Review Your Investment Strategy?
Beyond the annual review, there are other times when it is appropriate to revisit the strategy. These include when:
- there is a market correction;
- a member joins or leaves the fund; or
- a member starts a pension in the fund.
Each of these events can change the fund’s risk profile, cashflow needs, or liquidity requirements, which is why they are natural triggers for a fresh look at the strategy.
What Goes Into an SMSF Investment Strategy?
An investment policy is generally made up of two parts.
The first is the investment objective. This outlines the fund’s goals and expected outcomes, for example achieving a certain level of return over a certain period. It usually takes into account the age of the members, their retirement needs, and their investment risk profile.
The second is the investment strategy itself. This outlines how the fund will achieve the stated objectives, for example by setting investment asset ranges or naming the specific assets the fund will hold.
What Must Trustees Consider in the Investment Strategy?
When reviewing the strategy, trustees must give consideration to:
- the risk and likely return of the fund’s investments, having regard to the fund’s objectives and expected cashflow requirements;
- the composition of the fund’s investments, including the risk that comes from inadequate diversification;
- the liquidity of the investments, having regard to expected cashflow requirements;
- the fund’s ability to discharge its existing and prospective liabilities; and
- whether the fund should hold insurance cover for one or more members.
These points must be considered, but it is up to the trustees to decide how they apply them based on the circumstances of the fund.
Does an SMSF Need a Diversified Investment Strategy?
Diversification must be considered, but considering it does not mean you are required to have a diversified strategy.
Many funds hold just a property and a bank account, and that may be perfectly appropriate for those funds. The key is documentation. If the fund is concentrated, the trustees should record what consideration they gave to diversification, why the lack of diversification is appropriate, and why they chose those particular assets.
Do You Need Insurance for Members?
There is no legal requirement to hold insurance cover for the members of an SMSF. However, trustees do need to document that insurance has been considered, even if the decision is not to hold any.
How Does Starting a Pension Change Your Investment Strategy?
A member starting a pension is a common reason to review the strategy, because it usually changes the liquidity considerations and investment profile of the fund.
While members are all in the pre-retirement growth phase, expenses tend to be more predictable, and many funds do not need to hold large cash reserves. Once members reach the point of accessing their benefits, whether as pension payments, lump sums, or both, cashflow, liquidity, and a potential cash buffer become far more important.
It is not unusual, in the lead-up to the end of a financial year, for trustees to find they do not have the cash to satisfy even the minimum pension requirements. There can be several reasons for this, but it should raise questions about whether the current investment strategy is still appropriate and whether the fund’s asset holdings need to be reviewed.
Example: The One-Property, One-Bank-Account Fund
Consider a fund that holds a single property and a bank account. This may have been a reasonable strategy during the growth phase. In the drawdown phase, the question is whether it still works.
Australian investors often have an affinity for bricks and mortar, but that does not make property appropriate in every situation. If the rental income from the property cannot support the members’ retirement needs and minimum pension withdrawals, something has to change. The same issue applies to any asset that cannot be sold easily, such as holdings in unlisted companies or trusts.
Example: A Member Starts a Pension
A fund has operated for years with all members in the growth phase, holding mostly long-term assets. One member then starts an account-based pension and must be paid at least the minimum pension each year. The trustees review the strategy, consider the fund’s new cashflow and liquidity needs, adjust the asset mix or build a cash buffer, and document the reasons for the change. The review is what keeps the fund both compliant and able to meet its payments.
Key Questions for Trustees Reviewing Their Investment Strategy
Before signing off on the review, trustees can work through the following:
- Have you reviewed the investment strategy at least once this year?
- Does your documentation show either the changes made or that the existing strategy remains appropriate?
- Have you considered risk, return, diversification, liquidity, and the fund’s ability to meet its liabilities?
- If the fund is concentrated, have you documented why that is appropriate?
- Have you documented whether insurance for members was considered?
- Has anything changed, such as a member joining or leaving, a pension starting, or a market correction, that calls for a review?
- Can the fund meet its minimum pension payments and expected cashflow from its current assets?
Frequently Asked Questions
Does an SMSF have to review its investment strategy every year?
The law says the strategy must be reviewed “regularly” without setting a fixed timeframe. At least once a year is widely accepted and consistent with the ATO’s expectations.
Who is responsible for reviewing the investment strategy?
The trustees are responsible. They must also be able to show the fund’s auditor that the review was carried out and documented.
Does an SMSF investment strategy have to be diversified?
No. Diversification must be considered, but a concentrated fund, such as one holding a property and a bank account, can be appropriate if the trustees document why.
Is insurance for members compulsory in an SMSF?
No. There is no requirement to hold insurance for members, but trustees must document that they considered it.
What happens if the fund cannot meet its minimum pension payments?
It is a warning sign that the investment strategy may need review, particularly around liquidity and whether the asset mix still suits the drawdown phase.
When should the strategy be reviewed outside the annual review?
After events such as a market correction, a member joining or leaving the fund, or a member starting a pension.
Need Help?
If you are unsure whether your SMSF’s investment strategy still suits the fund, or whether it needs reviewing after a change such as a member starting a pension, Pitt Martin Group can help you review and document your strategy, weigh up diversification, liquidity and insurance, and prepare the evidence your auditor will expect.
As Sydney tax accountants, we assist trustees with SMSF compliance, investment strategy reviews and practical superannuation advice.
Pitt Martin Group is a firm of Chartered Accountants, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group, Sydney tax accountants, is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, Registered Australia Tax Agents, membership certification of the Chartered Accountants Australia and New Zealand (CA ANZ), certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.
This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.
