The future for SMSFs

I have long held the view that the last 15 years have been golden ones for the SMSF industry.  But my attitude stems from a structural opinion rather than simply capitalising on the fantastic growth the industry has enjoyed.  The attitudes of accountants and clients have made a fundamental shift from considering SMSF’s as nothing more than a tax planning tool, to collectively treating their SMS’s as a structure in which to accumulate real wealth of a sufficient balance to fund the lifestyle they aspire to once they retire.

I hold real concerns that recent legislative changes and debate around taxation of SMSF’s will devalue the use of our SMSF’s, potentially returning them to a minority player in the world of superannuation.  These issues risk relegating SMSF’s back to the status of tax planning dodge, available to only the rich.  The creation of the LRBA’s (Limited Recourse Borrowing Arrangements), variable tax rates on contributions or earnings, the loss of the accountant’s exemption and the current political debate illustrate my concern.  Large institutions continue to direct all their muscle and power into fighting against the existence of SMSFs , as a direct competitors to their own superannuation offerings.

Recently I attended the SMSF Association (formerly SPAA) annual national conference.  During one of the morning session the presenters made the following pints that I thought worthwhile jotting down and sharing.  

David Murray – RBA (Reserved Bank of Australia), CBA (Commonwealth Bank Australia), Head of the Financial System Inquiry was the first speaker.  He made the following points:

  • The compounding effect of high fees trashes Superannuation savings in retirement
  • We need to increase retirement income by 40% over what it currently is
  • Australia has a very small population at 0.3% of the world’s population, yet have 5% of the land mass and 11% of the global mass if you include our water rights.
  • If the superannuation system has inequity it will be politicised
  • The Reserve Bank of Australia controls interest rates, rates on deposits, money in the financial system and inflation. They can control almost everything, but they can’t forecast anything.
  • Therefore let the economy, the need for capital and rates of return versus risk determine SMSF investment in infrastructure.
  • Australia is a prolific borrower, but always repays its debts
  • Keep the SMSF system as de-politicised as possible and as simple as we can

Don Russell (second speaker) was an adviser to Paul Keating:

  • Superannuation locks your money away for 35 years.  During that time our SMSF’s will need to cope with 5 treasurers and10 superannuation ministers, running the gauntlet of bright ideas and ministers wreaking havoc on the system.
  • No real guarantee is afforded to superannuation self-financed retirees.   The uncertainty and length of time the money is locked away necessitates people having to believe it’s a good deal or they will not support the system.
  • If the compulsory superannuation fund system is to continue, people must believe it is a good thing and policy must be set accordingly with long term goals.
  • Furthermore policy should not be continually tampered with.
  • The industry so far has been unable to speak with one voice.  This leads to discrediting the industry. Politicians can then focus on dismantling the benefits (with particular reference to the tax concessions) by dividing and conquering.
  • As the population matures, there is a major collision looming between income, the needs of retirees and the budget,
  • Most people alive at 103 won’t be able to fund their retirement.  Achieving 103 years of age is a real prospect for today’s youth.
  • He questions whether we should have a 2 tier pension fund.  In principle this would be where people would privately fund between 60yrs-80yrs. After 80 the government would fund from 80 until death. i.e. Once their personal superannuation is exhausted.

The takeaways he wanted us to observe

  1. Stop the fighting in the industry
  2. Acknowledge aging is an important issue

Andrea Slattery (Final speaker): President of the SMSF Association

She contemplated what superannuation would look like in 80 years

  • Australian superannuation system is currently rated the 2nd best system in the world by Mercer.
  • The superannuation income streams were never meant to replace government welfare, only  supplement
  • Attitudes have changed since the original SMSF inception in 1992.
  • The industry should demand that superannuation has bipartisan support on
    • Objectives
    • Industry
    • Politicisation
  • There has been significant “chat” around the removal of tax concessions on voluntary savings components, ie the amount greater than 9.25%. Thus for most of the population, contributions between their 9.25% and current $30,000 cap would no longer be tax deductible if policies were introduced reflecting the “chat”.
  • 93% of the population take income streams upon retirement; they do not draw down their balance as a lump sum.
  • It is dangerous that each government policy is evaluated on its equity without reference to the government’s overall objective.  Policy should focus on an objective and then tax and other redistribution methods should be adopted to achieve equity. i.e. the basket of policies should be evaluated for equity, not each policy.

SMSF’s are a fantastic vehicle for the accumulation of wealth to fund retirement.  They offer flexibility and the ability to control your own affairs in a way not available to funds invested with a product offered by one of our institutions.  I only hope current debate and future legislative changes don’t undermine their value to those who are financially astute enough to run their own fund.