Having a younger member in your SMSF

3 min read

Are there opportunities a younger partner can bring to an SMSF?

There are certainly some strategic advantages to having a younger person (e.g. a child or a younger partner) in an existing SMSF but the merits of each will depend on the circumstances of each SMSF. 

Advantages include the following:

1.    Younger members can bring additional cash flow to an SMSF.

The main advantages to having a younger partner in an SMSF means that the trustee(s) may have more opportunity in structuring the SMSF when one of the members enters the pension phase.

With younger members potentially having longer working lives ahead of them, and a minimum (currently) 9.5% of their salary headed into super, having this directed to an SMSF could assist with managing cash flow issues. This could assist the SMSF towards funding retirement pensions for older members, or paying ongoing expenses of the SMSF (such as interest costs if the SMSF has borrowed).

How member balances are treated within the SMSF is important in this context. If member balances are to be quarantined to each member, transferring cash contributions in respect of payments to another may not be permitted. However, if all member balances are pooled together, this may be an option.

2.    Bringing in new members may open up new investment opportunities

New members to an SMSF, where balances are pooled together and invested as a collective, may open up new investment opportunities. It may allow for greater diversification of investments which could assist in balancing out negative returns in some markets due to volatility. It may also mean the SMSF has sufficient monies available to invest into assets it would not previously have done. An example may be an investment in direct property with no (or a reduced) need for leverage.

3.    Future running of the SMSF

An additional benefit that the younger members may bring to the SMSF is assistance in the ongoing management and operation of the SMSF. As older members retire, become less interested (or sometimes less able), or perhaps head off on the extended overseas holidays that had previously been just a dream, having younger members still involved in the operation of the fund can allow it to continue without the need for further contingency plans.

If the younger member has a power of attorney to act for older members in times of incapacity, or are executors of the estate, this again may assist in allowing the SMSF to continue to operate without looking for other people to take on this responsibility.

According to the March 2019 Self-managed super fund quarterly statistical report issued by the Australian Taxation Office (ATO), there is some interesting information when looking at the age demographic of SMSF members (see below). 

Age Group

Age distribution of all SMSF members (as at 30 June 2018)

Age distribution of SMSF members for SMSF established in March 2019 quarter

< 25

0.5%

1.4%

25 – 34

3.4%

13.8%

35 – 44

11.8%

33.1%

45 – 49

10.4%

17.2%

50 – 54

11.5%

14.3%

55 – 59

13.5%

11.3%

60 – 64

13.4%

5.1%

65 – 69

13.3%

2.4%

70 – 74

11.4%

0.9%

75 – 84

9.3%

0.4%

85 +

1.5%

0.2%

 

It is perhaps not surprising that the majority of SMSF members are in the pre-retiree or retirement age, with 51.6% of all SMSF members at 30 June 2018 aged between 55 and 74. What is more interesting is the age of members establishing new SMSFs (i.e. not joining an existing SMSF). 

Of all members of the 3,964 SMSFs established in the first three months of 2019, 48.3% were aged 44 or less. Another 31.5% of new members had not yet reached 55 and based on their preservation age would still be at least 5 years away from accessing their super savings.

Whether it’s an older or younger person considering joining join an existing SMSF, the existing trustees need to be comfortable about that person joining. Perhaps the fact that it’s predominantly another family member (e.g. a child in this case) that joins existing SMSFs, many existing SMSF members may not pay much regard to this issue.  Unfortunately however, most court cases that involve SMSF related issues arise after a member has died and the remaining members (or other estate beneficiaries) quarrelling over who gets the benefits paid to them.

SMSF members (as trustees) need to remember that they are all bound by the actions of other trustees in relation to the operation of their SMSF, so having faith in other trustees to do the right thing by you and the SMSF is important.

Whilst there can be some positive reasons for having younger people join an existing SMSF, ultimately the benefits versus the risks will vary from one SMSF to the next. But with the right people joining, perhaps rather than being an elixir to the ageing process, it can help SMSFs to last a whole lot longer.

Strategies 12 Jul 2019
Planning for retirement and paying superannuation might feel like an extra expense when you’re concerned about cash flow, but not doing so could compromise your financial future.
Strategies 25 Mar 2019
Including investment alternatives in your self-managed super fund, may provide additional diversification to protect your wealth from market ups and downs. Learn more.
Strategies 28 Feb 2019
Nothing affects your long-term returns more than structuring your portfolio with the right mix of assets. We share advice on how to do it the right way.

Information current as at 19 July  2019. The information provided is factual only and does not constitute financial product advice. Before acting on it, you should seek independent advice about its appropriateness to your objectives, financial situation and needs. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.