We all need money throughout our lives. When we're young our parents support us; as we grow older we work, earn, invest and save for the future. The sooner you start managing your finances, the better. A self-managed super fund is one way people provide for their retirement, and understanding the life cycle of an SMSF is a good way to learn how super works.
Here are the seven stages of a typical SMSF.
Stage 1: Setting up the fund
The fund is established with a trust deed, and its trustees are appointed. The fund then gets its own tax file number (TFN), Australian Business Number (ABN) and bank account, so it can receive contributions and rollovers, make investments and later pay pensions.
Stage 2: Money goes in
Once the fund is set up, members make contributions, roll over super from other funds, or both. The fund may receive several types of contributions.
Stage 3: Investing while members build their balance
The trustees prepare an investment strategy that suits the members' circumstances and risk profiles. In this stage the focus is usually on growing the fund.
Stage 4: Meeting a condition of release
A member can start drawing their super once they meet a condition of release, such as retiring after reaching preservation age, or turning 65. The fund can then start paying them a pension.
Stage 5: Investing in the pension phase
The focus shifts to a steady income with less risk. Members' tolerance for risk and ups and downs is often lower at this stage, and the fund needs enough cash to pay at least the minimum pension each year.
Stage 6: A member's death
This is one of the most significant stages. When a member dies, their pension may revert to a surviving spouse if it was set up that way, or the trustees pay a death benefit, following any valid death benefit nomination.
Stage 7: Winding up, or carrying on
After a member's death, whether the fund is wound up or continues depends on the estate planning in place, and on whether the remaining members want, and are able, to carry on.
Some funds carry on with the next generation. Then the life cycle starts again.
If you're a trustee, your accountant or financial planner can help you plan for each stage.