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SMSF trustees doing quite nicely

In the 12 months to 30 June 2015, a two-member SMSF averaged a 4.2 per cent investment return net of administrative costs and gross of income tax. Although this number represented a fall from 8.2 per cent in the 2014 financial year, as well as the 6.2 per cent average over the past five years, it was a stellar performance in an era of volatile investment markets and historically low interest rates.

What makes this performance an even better story is the fact these SMSF trustees are in or transitioning to retirement and are more likely to have a more conservative asset allocation to preserve capital and maintain liquidity to make pension payments. They also had to contend with a modest performance by the Australian Securities Exchange in this financial year clearly having a negative impact on trustees who are understandably attracted to the fully franked dividends Australian companies pay.

These investment numbers are drawn from a 31-page report, “Are trustees prepared for retirement?”, a joint venture research project by the SMSF Association and SMSF retirement expert Accurium, that drew on a database of more than 65,000 SMSFs transitioning to or in the retirement phase.

It was a timely report because it again provides evidence, concrete evidence, that in difficult investment times SMSF trustees are more than holding their own. Although there are still doom-and-gloom stories about the SMSF sector, the picture portrayed by this research, as well as other reports, is that this superannuation sector is in good health.

It’s also worth reminding people the two major government inquiries into superannuation and the financial services sector, Jeremy Cooper’s Super System Review in 2010 and David Murray’s Financial System Inquiry in 2014, essentially gave the sector a clean bill of health. The only question raised by Murray related to limited recourse borrowing arrangements (LRBA), and the government (rightly) decided to ignore this recommendation to ban LRBAs.

The importance of these investment numbers cannot be understated. As the report points out, they are giving SMSF trustees either transitioning to retirement or in retirement, the confidence they are well placed to live comfortably post the workforce. To quote the report: “The majority of SMSF trustees can be reasonably confident, with an 80 per cent probability, of entering retirement being able to afford a comfortable standard of living, which is defined as each person spending $58,922 a year at age 65.” (The $58,992 figure is the Association of Superannuation Funds of Australia figure required for a comfortable lifestyle in retirement.)

Surely this is what our compulsory superannuation system was designed to achieve – to give people a secure and dignified retirement. And it seems the majority of SMSF trustees believe they are going to achieve this.

The report was not all roses. The proportion of SMSF trustees who aren’t “reasonably confident of affording a comfortable retirement” increased from 25 per cent to 30 per cent compared with the findings in the previous year’s report. This is cause for concern, and probably reflects two intertwining factors – the uncertainty around the markets and the importance of establishing stable long-term superannuation policy so Australians can have the confidence to plan appropriately for retirement. In light of this, the need for government legislation defining the objectives of superannuation remains imperative.

This increase in the number of trustees worried about meeting their retirement goals also lends weight to that constant refrain from the SMSF Association, that is, the need for many trustees to get specialist advice. Although some trustees have the skill set to manage their SMSF, the fact remains the running of a fund involves complex decisions around investment, expenditure, regulation, tax and estate planning. And that list is not exhaustive. Getting advice from an SMSF professional can lighten that load considerably.

The report also had an interesting footnote and one that will hopefully dispel another myth that surrounds SMSFs. There is no lack of comment around wealthy retirees using their SMSFs as estate planning tools basically to maximise what they will pass on to their heirs. Well not so according to the report. Only 20 per cent of SMSFs specifically stated a desire to leave an inheritance. These retirees clearly believe they have a lot more living to do yet.

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