The new rules governing superannuation have actually now been passed through the houses of Parliament, meaning the brave new world of retirement savings has now begun.
While we’re now all trying to digest what it actually means, one scenario some sections of the industry are now predicting is a dip in the success and appeal of SMSFs.
But we shouldn’t be surprised at this outcome seeing the naysayers and detractors of the sector will use and have used just about any excuse to criticise the SMSF phenomenon.
We’ve seen this with the claims that people with balances that are too low are erroneously becoming SMSF trustees. We’ve seen this with the accusations SMSFs are benefiting almost exclusively from the use of franking credits. And we’ve seen this with the accusations SMSF investors are the main cause of overheating in the domestic property market.
This type of criticism goes right back to the Simpler Super legislation introduced by then-treasurer Peter Costello in 2007. That change to the super framework caused a massive spike in the establishment of SMSFs that many of these disparagers were saying could be ignored as a one-off event.
However, at the time of making this prediction none of them looked at the statistics closely enough to notice after the spike the establishment rate returned to what it was before the Simpler Super changes, meaning the normal momentum of the sector was not going away.
And to reinforce this point, the latest ATO SMSF statistics have shown establishments of these funds have continued to be, on average, 36,000 a year between 2012 and 2016 without any significant number of wind-ups.
To be fair there have been predictions of the continued success and eventual dominance of the sector, but almost no commentary has ever accompanied these forecasts noting this could be a positive thing.
To perpetuate the doomsday scenarios about SMSFs, we’ve now seen projections the funds under management and administration of these superannuation vehicles are set to drop because of the reduced contributions caps, a fair assumption, but also individuals will be shifting away from them as they are forced to confront the $1.6 million transfer balance cap and as a result move pension balances above $1.6 million into industry or retail funds.
This is an analysis based mainly on high net wealth superannuants, commonly seen as the mainstay of SMSFs, and their reaction to the changes, but as much of the criticisms before, ignores one very important factor.
Research has revealed over and over again the main reason people set up an SMSF is the control and flexibility these structures offer in managing retirement savings. It’s never been about the tax concessions, or franking credits, or fees for that matter.
So it stands to reason any dramatic changes to the retirement savings system like we’ve just seen could actually mean SMSFs will grow in popularity. Which other type of superannuation fund potentially allows individuals to move as quickly in response to these changes?
Probably not the larger funds we’re already hearing anecdotally as having challenges in adapting to the new rules in regard to their administration.
And while there are suggestions SMSFs will lose their appeal among high net worth individuals, it could just be their appeal among a younger demographic might now grow. The ATO statistics have provided evidence of this demographic shift even before the latest legislation, noting the median age of members who had a newly established fund in 2015 was 48 years – lower than the median age of members as at June 2016, which was 59 years.
So despite renewed negativity toward the sector, history, coupled with existing demographic trends, indicates a continued positive future for SMSFs, with specialised advice being an even more critical component in the years ahead.
