Adviser services

Strategy

A key risk faced by SMSF retirees is sequencing risk. A regular cashflow must be drawn from an SMSF in pension phase, of at least the minimum pension payment amount. Trustees face a trade-off between a long term consideration of investing in growth assets to maximise the SMSF balance, and a short term consideration of meeting cashflow requirements.

SMSF cashflow strategy
    

The SMSF cashflow strategy assists trustees to secure their cashflow over a desired time period. This frees up the fund’s remaining capital to be invested in growth opportunities over the term for which cashflow has been secured. Investments in growth assets can be made without the worry that assets will need to be drawn on to fund cashflow. This reduces sequence risk and can allow growth opportunities to be realised even in the event of a downturn. The trustee can take a long term approach to investing in market based assets to help maximise the SMSF balance over the term.

In particular, the use of an RCV0 fixed term annuity can secure the cashflow using the minimum amount of capital compared to other more capital intensive options such as a term deposit. An RCV0 fixed term annuity is an annuity with no residual capital value; the focus is entirely on providing a regular cashflow for a fixed period by combining both capital and interest in payments over the term.

Benefits

The SMSF cashflow strategy addresses three key goals SMSF retirees are looking to achieve when investing the assets of their fund:

  1. guarantee cashflow, in particular so minimum pension payments can be paid enabling the fund to claim tax exempt income,
  2. free up capital to invest in growth - invest in growth assets to maximise balances available during retirement, and
  3. maximise the SMSF balance while controlling risk - exploit growth opportunities while controlling downside risk.

Challenger’s fixed term annuity

Challenger provides a fixed term annuity that can be used to implement the SMSF cashflow strategy in an SMSF.

A fixed term annuity creates regular, guaranteed cash flow for your client’s desired term, regardless of how investment markets perform.

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* This information is intended for SMSF professionals. Accurium is not licensed to provide any financial service or financial product advice and does not endorse or provide any opinion in relation to this product. Accurium is not remunerated for providing this information. For more information about Challenger’s products, including the Guaranteed Annuity, please refer to Challenger’s website or call Challenger’s Adviser Services on 1800 621 009.