Bruce Brammall, 21 November, 2018, Eureka Report
SUMMARY: New survey aims to bust a few myths about running SMSFs, and shows how much work is really involved.
DIY super fund trustees are spending more than eight hours a month running their retirement savings, a new survey shows.
About two hours a week is what trustees say they need to keep on top of the fund – covering administration, performance monitoring, investment selection and staying up to date with regulations.
The finding was part of a survey conducted to launch 2018 SMSF Week – sponsored by the SMSF Association – to inform and educate the 1.1 million current trustees and those considering starting their own fund.
The SMSFA surveyed 2315 trustees to try to bust a few myths of DIY super. And while the five chosen might be well understood as being myths by readers, some of the facts and figures to back them are fresh and interesting.
Myth #1: Are SMSFs suitable for everyone?
No. We know that.
The top three reasons they aren’t are:
- having sufficient time to do it properly
- a large enough superannuation balance to get started and
- the financial knowledge to take control.
Regarding time, the average SMSF member spends more than eight hours a month doing the work of trustee. That’s an extra, full, work day a month (though many are obviously in retirement).
That’s made up of 1.7 hours of administration and paperwork, 2.3 hours of ongoing monitoring and reporting, 3.3 hours of selecting and researching investments and 1.1 hours of keeping updated with legislative regulations.
What do trustees find the hardest thing about running a SMSF? Keeping track of changes in rules are regulations tops the list, with 27% of trustees citing this.
It is followed by choosing investments (26%), the impact of regulatory changes (21%), paperwork and administration (18%), and understanding changes to rules and regulations (8%).
The average age of members when SMSFs are started has been falling, along with the average balance at the time of opening.
Between 2006 and 2010, the average had reach 53 years of age, with a balance of $580,000. In 2011-2014, this had fallen to 52 and $470,000, but between 2015 and 2018, this had now dropped to an average age of 48 and a balance of $400,000.
Myth #2: Do SMSFs need $1 million to be cost effective?
The most commonly quoted recommended figure for a minimum balance for a SMSF is $200,000. The Productivity Commission has released two reports this year that push the case that this amount should be $1 million.
The SMSFA argues the PC’s reasoning for a $1 million minimum is wrong and based largely on data comparisons that are completely inappropriate.
The SMSFA says the PC’s report looks at tax and set-up costs for APRA-regulated funds and SMSFs in a ways that cannot be compared.
And SMSFs have a significant proportion of members in pension phase, which distorts comparisons. SMSFs in pension phase tend to have greater balances, but also take less risks and hold more cash and income-generating investments.
Previous research has suggested that accountants believe the minimum balance should be $240,000 and financial advisers think it should be $310,000. The average SMSF balance at start up, according to the survey, is $430,000.
But it is still about control. Of the survey respondents, more than 50% stated investment control was a key reason, followed by wanting to choose specific investments (32%), advice from an accountant (29%), to achieve better returns (28%), saw what existing funds were charging (27%) and because they were more tax effective (20%).
Myth #3: Could the removal of franking credit refunds significantly impact SMSFs?
No-one involved with SMSFs is in favor of Labor’s policy to ditch the returning of excess franking credits. But here are some statistics that show exactly how heavily it is likely to impact SMSFs.
The survey noted that around 47% of SMSFs are in retirement phase, or around 267,000 funds.
And more than 60% of members are aged over 55, which the survey said suggested there are 677,000 members who will be immediately affected, or affected in the 10-15 years of entering retirement phase.
About 245,000 members have incomes of less than $58,000, suggesting the use of franking credits could be a significant source of their income. Analysis of ATO data from 2014-15 for the survey said the average benefit paid by SMSFs is about $50,000, while the average tax return is $5500.
It will hit those in retirement harder. Older SMSF members tend to have higher allocations to listed Australian shares and lower contributions to soak up the franking credits that aren’t going to be returned, if unused.
It’s an issue that will be worse for SMSFs with higher holdings of Australian shares. On that front, retirees (those over 65) have around 40% of their assets in Australian shares, compared with about 38% (aged 55-64) and 25% (those under 55).
Myth #4: How can I be sure my SMSF is appropriately diversified?
Around 82% of SMSF trustees think that it is important that their fund is diversified, but half say they face barriers to achieving diversification.
The largest “barriers” include that it is not a goal for their fund (which will include high-conviction investors) at 12%, a lack of funds (11%), that it creates poor returns (9%) and that it’s difficult to access investments with overseas exposure (8%).
On that last point … I call rubbish. A base level of international exposure can be achieved via ETFs (such as Vanguard).
But it’s also concerning that so many funds believe diversification is achieved by holding shares in 20 or 30 Australian companies. No, that gives you diversification across one asset class – Australian shares.
Diversification should be across asset classes also, with appropriate amounts of money being invested across cash, fixed interest, property and shares.
This has been improving. The number of funds that are invested in one asset – whether that’s shares, property, cash, or fixed interest – has dropped considerably, from around 60% in 2016 to around 50% in 2018.
Myth #5: Does having an SMSF mean I have to go it alone?
It can be confusing for those considering starting a SMSF, or who have recently started one.
Many who are entering SMSF-land are doing so because they want to do it themselves. But for most, that would be crazy. Do you really know enough about tax and audit, along with what you need to know about investment, the law and administration?
And would doing it all be risking costly stuff-ups, if you don’t know what you’re doing?
About 20% of SMSFs sought no professional assistance. Of the remaining 80%, the top professionals used included accountants for tax advice (47%), financial planners (26%), auditors (22%), stockbrokers (13%), accountants for investment advice (13%) and SMSF administrators (13%).
The average number of professionals used was two.
For those who didn’t use professionals, or didn’t use more professionals, the main reasons were high cost (45%), lack of trust (42%) and inconvenience (27%).
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s sixth book, Mortgages Made Easy, is available now.