How do your annual SMSF accounts compare? The financial statements for most SMSFs are prepared on a cash basis with no consideration for the retirement obligations of the fund’s members. This is less than helpful when say:
- you have less than $200,000 and are mid-career, or
- you are a couple approaching retirement with a combined balance of $500,000 or
- you are a young adult with no savings, or
- you have entered retirement phase with assets of around $650,000
An alternative to cash accounting would include some recognition of the retirement obligations of each SMSF. This is achieved by having each member formally set a retirement objective and including this in the notes to the accounts. This gives rise to a value of accrued benefits over the lifetime of all members relative to their objectives.
- This would clearly indicate whether the fund is on target to meet its members’ retirement objectives.
- There would be a greater incentive for all individuals to engage with their retirement objectives and savings.
- It could be referred to by financial planners as a guide for providing further advice to members and trustees.
- Any changes to the retirement objectives of the members could be explicitly measured and reported to both members and Government.
- It would be cost neutral to Government and potentially offer savings in the longer term with a greater emphasis on long-term investment strategies.
- The fund’s investment returns could be benchmarked annually against the assumptions used to determine the value of accrued benefits.
The concept of accrued benefits is already well established internationally within both accounting and actuarial standards for superannuation and pension funds.
Also by including this value in the notes to the financial accounts as a discretionary liability, it would remain off the balance sheet and yet would provide added guidance to both trustees and members alike.
For an immediate assessment of your accrued benefits, please try our online calculator below:
Alternatively, you can download our submission to Treasury’s, “Review of Retirement Incomes in 2020,” – here.