While they will both still have their own individual super balances, an SMSF provides a unique opportunity to invest together – and this comes with some valuable extra benefits that are often overlooked.
How does shared investing work?
A big difference between an SMSF and other types of funds is that normally all the money in an SMSF is invested 'together' no matter how many members or individual member accounts there are. No-one 'owns' any specific investment, they just have a fair share of all of them.
An SMSF will usually have a single bank account and a single investment portfolio no matter how many members there are.
Even if it has several investment portfolios (for example, some of the money is invested via one platform but the SMSF also holds assets on another platform or off platform entirely), it’s likely that both will be shared between all the members and member accounts.
For example, Mike and Jill have recently set up an SMSF. They are in the process of arranging rollovers to bring all their existing super into the fund. The cash from these rollovers will all be transferred into the same bank account, they won’t have one each.
Contributions from their employers and any contributions they make themselves will also be paid into this same bank account.
Imagine over time, Jill’s employer continues to put new contributions into the fund but no more money is going in for Mike. In fact, Mike has already retired and started a pension. Money is coming out of the fund each month to pay his pension.
Since the SMSF will generally have just one bank account, Jill’s contributions will come in, Mike’s pension payments will go out. If there's any leftover, it will be invested. If there's not enough to pay Mike’s pension, some of their (shared) investments will be sold.
But that doesn't mean Jill is giving her super to Mike.
While the money might be invested together, behind the scenes there will be a running tally kept of how much 'belongs' to each member. This will usually be done by the fund’s accountant or administrator.
This process is really important because legally Mike and Jill are just like any couple with money in a public fund – their individual account balances have to be tracked entirely separately, they can’t simply move some of Jill’s super to Mike or vice versa. The SMSF just allows them to manage the investments together.
The accountant or administrator will keep track of the fact that Jill’s balance is going up while Mike’s might be going down. If one of them was to leave the fund and take out all their money, they would still get a fair share of the SMSF based on how much they have put in, taken out and what the investments have earned.
Let’s say Mike put a new contribution into the fund. There would be no need to create a brand new investment account. Instead, the money would be paid into the same bank account and invested. But behind the scenes, the fund's accountant would record a new 'accumulation' account for Mike and keep track of it quite separately to his pension account.
Again, this record keeping in the background is important because legally Mike can't just add new contributions to his pension account.
Shared investing is different in a public fund
All of this would be quite different if Mike and Jill belonged to a public fund.
For a start, each member would have their own super account and they would operate entirely separately. In fact, members like Mike who have both a pension and an accumulation account would have two different accounts. It wouldn't even be possible to use cash from his own contributions to pay his pension.
Shared investing is simpler for advisers
For an adviser, this shared investing simplifies a lot of things:
- Rebalancing the portfolio – there is one investment account to deal with not multiple.
- Managing cash flow for pensions – in Mike and Jill’s case, all income from all investments in the fund is available for Mike’s pension.
- Speed to implement strategies – in our example here, Mike made an extra contribution despite all his super being in pension phase. In a public fund, he would need to set up a new account for the contribution but not in an SMSF. The contribution can be made instantly – it’s as simple as a bank transfer. The fund’s accountant will worry about tracking Mike’s new accumulation account.
There is nothing special in the super rules that allows this for SMSFs but not public funds.
It’s just that it would be complicated to provide this much flexibility in a public fund and it probably wouldn’t be in the best interests of all members to invest in doing it. But in an SMSF, the trustee only needs to worry about the interests of the small number of members of the SMSF.
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