Today I want to discuss a crucial issue that many self-managed super fund (SMSF) trustees might be overlooking. We're going to delve into the topic of having excessive cash investments within your SMSF and why it's essential to be aware of the potential drawbacks.
The Temptation of Holding Cash in SMSFs: We all know the appeal of having cash in our SMSFs. In fact, according to recent statistics, over 40% of SMSFs in Australia tend to hold a significant portion of their funds in cash. This provides a sense of security and immediate access to funds when needed. Furthermore, in the current high interest rate environment, cash products are generating above average rates of return. However, is there such a thing as having too much cash in your SMSF?
The Drawbacks of Excessive Cash Holdings: Let's talk about the downsides of holding a substantial amount of your SMSF in cash. One of the most critical concerns is the risk of low returns over the long term. In fact, data from the Australian Taxation Office (ATO) reveals that SMSFs with high cash allocations often experience lower overall returns compared to those with a more diversified portfolio. Additionally, inflation can erode your purchasing power over time.
Missed Investment Opportunities: By keeping a large portion of your SMSF in cash, you could miss out on an eventual rebound in shares and bonds. It is important to remember that over the long term (which matters most), cash has generated a 20 year annual return of 3.5% p.a. whereas Australian and US shares have generated between 9 and 10% p.a.. Australian bonds have also generated 5.5% p.a. over the last 20 years (Vanguard).
Tax Implications: It's also crucial to consider the tax implications of having too much cash in your SMSF. Whilst superannuation does have a low tax rate of just 15% on income, growth assets are often preferrable as the entire capital gain can be eliminated by transferring from super phase to pension phase after age 60.
Conclusion: In conclusion, it's crucial to strike a balance in your SMSF between the comfort of cash and the potential of other investments. To navigate this, seeking advice from a professional financial planner is a wise choice. If you have any questions or need assistance in optimising your SMSF investments, please don't hesitate to reach out to me.