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A not so super strategy

Are you one of the 1.1 million Australians with a self-managed super fund? The marketing hype is pretty hard to resist, with promises of greater control and better returns.

This would all be great if it were true. But analysis released by the Productivity Commission indicates that for most people it isn’t.

The average self-managed fund needs a balance of at least $1 million to perform better than an institutional super fund. And only 16% of self-managed funds have that sort of scale.

Getting this wrong comes at a huge price – the difference in performance between the smallest and largest SMSFs is as much as 10 percentage points per annum.

Much of this comes down to running costs. If your fund is small, you’ve got to have insanely good performance to have a chance of beating the returns from a well-run institutional fund.

And that points to the other key problem: the importance of highquality professional advice, because the decisions about whether you should have an SMSF and, if so, how it should be invested, are complex.

ASIC recently looked at the quality of financial advice given to people with self-managed super, analysing 250 client files.

In 91% of cases, the financial adviser had failed to comply with some aspect of their obligation to act in their client’s best interests. In 19% of cases, the self-managed fund was invested in one type of asset – often property – which is unlikely to be a good investment strategy.

ASIC also examined the views and experiences of people with SMSFs.

Many lacked a basic understanding of how their fund operated or what they should be doing to manage it. Some 33% did not know it must have an investment strategy.

Many saw their self-managed fund as an opportunity to invest in property, motivated by fears of being locked out of the market or the desire to help their children. That’s fine while the property market is rising but as we’re now seeing, it doesn’t always.

There probably is a role for self-managed super for people who have the resources to make it work. But when we know that this option won’t work for the majority of people, we’ve got to ask whether we’re doing enough to protect consumers.

Super is a mandatory system, and super contributions enjoy significant tax concessions. That’s because super plays an important role in our economy – to provide a source of retirement income to replace or supplement the age pension.

It can’t do that if super balances are being eroded due to poor investments, based on shoddy advice.

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Has there been any serious study of what would happen to our economy if there wasn’t compulsory super? What empirical evidence is there to support the need for mandatory superannuation?

For example:
People could spend that extra money bolstering the economy. They would have extra funds to buy into the housing market when they were young and needed the extra money, etc.

If people chose to save their money, it would be the same as SMSF, and could be given the same tax breaks.

The Government would possibly have to pay out more many years down the track in pensions, but that increase in cost may well be more than offset by the extra tax they gain on the spending from the extra money in the economy.

I think that rather than blithely accepting the assertions that

Where is the supporting evidence?

Edit: I need to qualify that I am not against superannuation. I would just like to have the evidence for the importance of it out in the public domain, rather than having it as folklore.

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Hmm there are a few key issues with that concept.

First of all if you tell someone instead of having super they can get thousands of extra straight up each year, they’re probably gonna take that option, regardless of if it’s good for them. All you need to do is look at how people manage credit cards to see people will take money now at the cost of the future. This also most impacts the poor or those with poor financial skills, as they’re unlikely to wind up retiring with many assets at all outside super.

The second problem comes back down to the housing market. You specifically cite property as being a potential earlier investment. Demand for buying houses is already crazy causing a huge inflation in price. Adding more money into the mix would likely result in large amounts of benefits flowing to real estate agents, builders and sellers rather than buyers. Plus property is much more liable to suddenly lose value vs a broad investment portfolio.

Finally Remember the time scale we’re talking about. People reaching working age now aren’t going to retire for over 50 years. Can we guarantee the government can deal with the huge increase in pension costs in 50 years time? It’s impossible to see that far. Not to mention the pension already overloads Centrelink and leaves many in poverty. I’m constantly covering my grandmother’s unexpected bills and she lives in ancillary accommodation on our property, one of the cheapest ways to live.

So overall I think it would be an extremely poor decision to remove the safety net that underpins all our futures, regardless of the fact it needs improvements. We need to focus on making them rather than arguing over the system itself.

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Is the topic here about how Super is being delivered for some? Those with a SMSF!

SMSF as Paul Keating puts it “ They were almost an afterthought added to the legislation as a replacement for defined benefit schemes.“

They evolved quickly as financial services business promoted SMSF to individuals or small group schemes. SMSF appealed to those with high cash flows who are accustomed to taking financial risk as a way to make even more wealth. SMSF enable a degree of direct control not available to ordinary super fund members.

Some smaller companies managed their funds wisely and used professional investment funds to support their savings. I’ve been a member of two such funds. They performed well above the industry standards due to sound practices and minimal overheads.

Some astute individual investors anecdotally found ways to use the funds to supplement their already substantial investments and take advantage of the tax concessions. Often through property investments or leases of assets to supercharge returns. The upper limits on individual pretax super contributions were for a number of years many times greater than the amounts able to be contributed by everyday employees to industry schemes.

Some astute “financial advisors” created a market selling SMSF to individuals. Anyone who had a few hundred thousand in super or aspired to was a suitable target. Many everyday investors with modest super savings were encouraged into SMSF by various means.

As @AlanKirkland notes per the ASIC report there are significant consumer concerns arising from the SMSF sector due to poor performance.

SMSF control approx $750B of the $2.7trillion invested in Australian super. Approx 26% of all funds invested.

There are approx 1.1M accounts held in Approx 600,000 SMSF funds.

Compare this with 27.5M accounts held by those of us not in SMSF’s.

While SMSF may on paper appear to be poor performers, the average amount in each account is nearly $700,000 compared with an average of less than $200,000 for non SMSF members.

Are SMSF members gaining other benefits not measured directly through fund growth?
Are SMSF using concessionally taxed funds in ways that are not adding effectively to the overall national wealth?
Are SMSF using tax concessions to create wealth at the expense of the broader economy, and thus the majority of consumers in retail and industry super funds?

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Yes we have a SMSF. Its becoming less relevant since the balance is getting lower—we’ve been retired and drawing it down for over 20 years. The balance is about $1m and over time we have managed to do significantly better than our old arrangement with BT.
Unfortunately we are getting tired and really want to hand the work to someone else. Maintaining market knowledge and the current volatile situation make it hard work! This is no longer a set and forget thing.
Our investments are All Australian blue chip shares and as such our income will suffer greatly under Labor’s franking credit policy. Our options will be to move the assets to an industry superfund (which may perform much better under Labor) or go for riskier unfranked investments.
We will wait and see how draconian the real implementation of Labor’s retirement tax really is.

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