Opinion piece written by Tracey Scotchbrook, Head of Policy & Advocacy, SMSF Association
First published in The West Australian 21 August 2023. Licensed by Copyright Agency.
There are two words that perfectly encapsulate why people choose a self-managed super fund — choice and control.
Control has been a long-held attraction of SMSFs. Although managing your own superannuation does entail responsibilities and obligations (many legally enforceable), it comes with the benefit of having greater engagement with and understanding on how your superannuation is being invested and performing.
It’s no surprise that there is always a pick-up in SMSF establishments after cataclysmic events such as the Global Financial Crisis and COVID.
SMSFs also provide more investment choice, whether it be the type of investment, level of exposure, or market timing. Although the Australian Prudential Regulation Authority funds now offer more choice — some offering limited direct investment choices — they are typically limited to a choice of risk profiles such as aggressive, balanced, or conservative investment style, with the actual investment decisions remaining with the fund. With SMSFs, trustees, either with or without advice, make all the decisions.
But before elaborating on the benefits of SMSFs, two important caveats. First, SMSFs are not for everyone. That’s always been the association’s mantra. For many people, having their superannuation in an APRA fund is the correct decision. Second, it is highly advisable to get specialist advice before deciding to establish one.
Today, SMSFs are not just for older Australians. Although three-quarters of SMSF members are aged between 50 and 84, Australian Tax Office data shows a higher growth rate in new establishments among a younger cohort, with the 35-44 age group providing 34 per cent of all SMSF establishments in the March 2023 quarter.
This new generation of SMSF members not only like having control but want clear visibility about how their superannuation is invested. Ethical and sustainable investing are important considerations for this generation and an SMSF allows them to achieve this.
What’s also encouraging more younger people to join is the fact they can now be reassured that they are not paying over the odds to have an SMSF, nor are they comprising their investment returns. For a long time, it was the accepted “wisdom” that an SMSF balance had to be $500,000 to be competitive on cost and investment. But two pieces of research have debunked the myths about costs and returns.
The actuarial firm Rice Warner demonstrated that SMSFs with balances exceeding $200,000 are cost-competitive with APRA funds and SMSFs with balances exceeding $500,000 are typically the cheapest alternative.
On the investment front, University of Adelaide modelling allowed the first direct sector comparison between APRA funds and SMSFs. Two reports, the first examining returns for 2017-19 and the second for 2020-21, show that SMSFs with balances exceeding $200,000 perform, on average, on par with, or better than, APRA funds.
Discussions about SMSFs seemingly go hand in glove with property investment. Interestingly, non-residential property represents only 8.8 per cent and residential property 4.9 per cent of total SMSF assets. But for SMSFs attracted to residential property, having their own fund gives them easy access. If they opt to go down this path, they can use leverage via a limited recourse borrowing arrangement, or an LRBA.
Listed Australian shares remain the most popular investment class, followed by listed and unlisted trusts, and cash and term deposits, highlighting the flexibility of SMSF investment.
SMSFs can provide excellent planning opportunities, with pre-retirement planning a good example. When using recontribution strategies, an SMSF can enable separate pension interests to be created for the member to manage taxable/tax free components. Although these strategies are possible in APRA funds, they would require separate member accounts, thereby increasing costs. Managing capital gains tax is another planning opportunity.
For small business owners and farmers, having their SMSF acquire and hold the business premise or farmland can be a master stroke. It means that the lease payments — a business expense — are contributing to their retirement, as is the capital growth from the increase in the property’s value. For the business itself these arrangements provide stability.
I repeat, SMSFs are not for everyone. But for those who choose to accept the responsibilities they entail and are prepared to commit the time they demand, SMSFs can give you direct control over your superannuation, whether in the accumulation or retirement phase. Just ask the more than 1.1 million who have opted for an SMSF.
Tracey Scotchbrook is head of policy and advocacy at the SMSF Association.