Why direct property investment may not be suitable for retirees in SMSF.
The general public perception is they can live on the rental
income of their property investments through SMSF.
But what a lot of SMSF investors don’t realise is that because
of its concessional tax benefits, it is expected that the account balance in a
superannuation account based pension scheme is expected to be orderly withdrawn
within a person’s life time. Obviously if the investment does very well there
will be residue for the beneficiary/s.
The calculation for pension payment is the account balance
of the investment divided by the pension factor*. One example is a $600,000 fund with one
property investment worth $450,000 and the rest in cash bank deposits. Using
four assumptions in this example: the first two assumes that the member draws
the minimum pension; property value increasing at 3% to inflation on the first
assumption; no growth on the second assumption; conservative fees expenses; e.g.
annual returns, audits, accounting etc. at the end of 13th years there
are barely any cash left to make pension payment.
The difference in the last two assumptions is that the
member elects to draws a yearly pension of $35,000, the cash runs out approximately
on the 7th year.
It baffles me in this instance why people want to put
property in a SMSF that has all the compliance complications and, expensive
setup and exit fee if they only want to draws the minimum pension. The rental
income in this scenario is already tax free if their total taxable income is
less than $18,200 a year.
* Pension factor used in
this example is the standard factor. Please note that the withdrawal relief
provided after the Global Financial Crisis of 2008/09 is being phased
out. If you're receiving an income stream in 2011/12 or 2012/2013, the
minimum annual payment is 75% of the normal rate. For example, if you are
age 60 you only have to withdraw 3% instead of the usual 4%.
