Super growth for self manager super
Despite recent reports to the contrary, self managed super funds continue to grow rapidly. Grant Abbott explains the factors behind this phenomenon.
Super growth for self manager super
Despite recent reports to the contrary, self managed super funds continue to grow rapidly. Grant Abbott explains the factors behind this phenomenon.
Self managed super funds (SMSFs) are now the favoured choice in retirement savings vehicles for super fund members looking to do their own thing.
This includes executives, retirees, small business owners and entrepreneurs. Despite recent press that this sector is no longer on the rise, the most recent figures published by the Australian Prudential Regulatory Authority (APRA) prove otherwise. The assets managed by SMSFs experienced 25 per cent growth during the year to September 1999 ($11.1 billion), and were the strongest growing sector in superannuation. Financial planners ignoring this growing sector do so at their own peril.
Rapid growth
In 1994, the Government enacted fundamental changes to superannuation laws that made SMSFs more attractive as a retirement investment vehicle. From a low point of 55,000 `funds with $14 billion in assets in 1994, the SMSF sector has seen continuous rapid growth. Five years later, the September 1999 figures show the sector has grown to more than 197,000 funds with assets under management of $55 billion.
The growth of the SMSF sector will continue. Industry consultant Rainmaker Information Services projects the SMSF sector will grow to $175 billion by 2008. With employee choice of superannuation funds close to being finalised, expect these estimates to rise with executives choosing a SMSF to house their families retirement wealth.
SMSFs also attract the wealthiest superannuation clients. In 1998 SMSF member account balances were on average 345 per cent higher than corporate funds and 1,260 per cent higher than retail super funds.
SMSFs are growing so rapidly that they may soon surpass retail funds in funds under management. Insurance and Financial Services Association (IFSA) figures for the period ending December 1999 show that the retail managed funds industry (excluding superannuation) is currently $70 billion and growing at 15 per cent per annum. Based on current growth figures, there may be more assets in SMSFs than the retail funds management industry by as early as December 2002.
According to the Australian Stock Exchange, the market capitalisation of the ASX at December 1999 was $550 billion. At 30 September 1999, APRA estimated that there was more than $21 billion in equities in SMSFs or 4 per cent of the entire stock market. This is significant growth from 1994 figures of total equity investments in SMSFs of $2.8 billion.
There are six primary reasons for the rapid growth in self managed super funds.
1. A family affair – Government regulations allow the trustee of a SMSF to accept four members. As such, the SMSF is the perfect vehicle for families to aggregate their retirement savings. This includes mum and dad as well as the children. In some cases, grandparents may be accepted as members of the fund provided certain rules are met. Sharing a super fund means lower average member costs plus strategic freedom in the fund.
Recent changes to the super rules, however, require each member of a SMSF to also be a trustee of the fund. Accordingly, existing member-trustees of funds have to ensure that anyone coming on board as a member of the fund is also able to take on the responsibilities of trustee.
2. Investment choice – Investors, business people, executives and families with SMSFs are generally motivated by the idea of investment choice. The current rules allow the trustee of a SMSF to invest in shares, residential property, farms, instalment warrants, bonds, managed funds and the like. Furthermore, the Government has implemented rules that enable a business owner to acquire business real property in their fund and then lease it back to their business.
Investment restrictions include the in-house assets test that prevents the trustee of a SMSF from investing more than 5 per cent of the fund’s assets in loans and investments in a member, employer-sponsor, related party or related trust.
3. Creditor protection – One of the key risks in being a financial planner and any person in business is the threat of litigation if an investment or a business goes sour. If all goes wrong then bankruptcy may ensue.
The SMSF provides members of the fund with creditor protection. If the member faces bankruptcy, monies inside a SMSF are generally protected from creditors – not only when the member is in business but also when they are retired. For example, even if a member is bankrupt and retired, they have creditor-free access to their funds up to their pension RBL.
4. Low taxes – SMSFs, like all super funds, are concessionally taxed. Capital gains are benefited by a 33 per cent reduction and the maximum tax rate is 15 per cent. The greater tax benefit for trustees, however, is investing in Australian shares and in particular, those shares paying imputation credits.
For example, where the trustee of a SMSF receives a 36 per cent imputation credit on a 15 per cent taxable fund, 21 per cent of excess credits on the dividend are generated in the fund. This tax credit may be used to shelter other income, capital gains and contributions tax payable by the fund. Instalment warrants may also be used by trustees of the fund to legitimately leverage imputation credits.
5. DSS benefits – The aged pension is getting harder to obtain year by year. The Government, however, has implemented laws enabling members of a SMSF to take an assets test exempt pension. The assets test exempt pension is relatively easy to establish in a SMSF and offers great benefits for clients.
6. Death benefits – The SMSF can be used as a flexible and highly tax-effective estate planning tool enabling tax-free lump sums to be paid to spouses and concessionally taxed income streams to paid to children irrespective of age.
Grant Abbott is a director of The Strategist Group.
The rapidly growing SMSF sector
Type of Fund Number of Funds Assets — $Billion Growth p.a
Corporate 3,210 69 10%
Industry 97 30 24%
Public Sector 49 96 23%
Retail 229 115 20%
SMSF 197,123 55 25%
Total 200,699 365 15%
Source: APRA Superannuation Trends — September 1999
Projected growth of SMSFs
Source: Rainmaker Information Services
Average fund balance
