Drilling down into DIY super

For years we moaned about the quality of up-to-date statistics on self-managed super funds. The data was years old by the time it came out.

That is changing. We’ll never get up-to-the-minute figures like we do with share prices – well, unlikely in our lifetime – but at least we’re getting figures in time for useful comparisons.

The ATO’s most recent stats show what was happening up to 30 June, 2012 (although some of their statistics are only to 30 June 2011).

The ATO’s report was touched on last week by Ian Verrender (Time for a DIY super review), who discussed the returns from SMSFs over the period. And the fact that those with large cash holdings, in a recovering market, will underperform.

Things tend not to change significantly from year to year with SMSFs. Small changes at the margins, as you’d expect. But a good read of the ATO’s “Self-managed superannuation funds – A statistical overview” released in December is a fascinating read. But most of the comparisons are for a four-year period.

Sure, SMSF total numbers have growth rates not dissimilar to China’s GDP, and for about as long. But that’s been well covered. It’s the fastest growing sector, has around 479,000 funds and approximately $439 billion in assets.

What was really interesting? Confirmation of the slide in contributions in recent years; how many SMSF trustees continue to operate APRA-regulated funds; how above-average SMSF trustees are financially; and how investment trends have changed in SMSFs.

The majority of statistics that I’ll use today are comparing figures over the four years leading up to 30 June, 2012.

For a start, contributions to SMSFs have dropped off a cliff in recent years.

The ATO says that annual contributions to SMSFs dropped by 22% over those four years, while contributions to APRA-regulated funds dropped only 10%.

This is, despite the ATO’s weasel wording (see next par), largely because of the cut in the maximum concessional contributions (CC) limit from $100,000 to $50,000 for the over-50s on 1 July, 2010. Expect that figure to fall again, when the stats are out for a period covering to 30 June, 2013 – the first year in which everyone had the same CC limit of $25,000, which represented another halving from $50k to $25k for the over 50s.

The ATO, the revenue arm of government, says: “This is not unexpected given economic circumstances during the period.”

Right. Let’s not blame it on the elephant in the room. The statement continues:

“It had also been anticipated that government initiatives introduced from the year ended 30 June, 2010 would have slowed growth in member contributions.”

Seriously? The concessional contribution rates are halved from $100,000 to $50,000 for the over 50s on that exact date and that only rates second, of two, potential reasons for a massive drop in contributions?

Aw, come on!

The ATO can claim what it likes. Eureka Report readers had their say on why their contributions plummeted in these columns (SMSF mystery). And, according to you, it was mostly to do with contribution limit cuts, rather than the economy. I followed up about a year later and it was a similar story (SMSF inflow eases).

But comparing SMSF to non-SMSF contribution falls is something different.

That SMSF contributions dropped more than double than APRA-regulated funds (22% compared to 10%) is actually more to do with income levels and financial sophistication.

Higher earners are, clearly, more likely to be able to contribute more to super. Therefore, they are most likely to be hit by lowered limits.

To take one example, the average incomes of SMSF members aged 35-49 was $124,000. For non-SMSF members, the average salary is $65,000.

Pensioners. There’s more of you. Between 2008 and 2011, the number of SMSFs reported to be paying a pension jumped from 21% to 29%.

Similarly, the number of SMSFs that start to pay a pension in the first year – that is, those who have set up a SMSF to control their pension – rose by 11%.

And there are less of you holding on to previous funds. In 2008, about 24% of SMSF trustees were holding on to an external fund. At the end of FY2011, it was just 20%. There are good reasons for holding on to non-SMSF accounts. First among these is for existing insurances.

The “average” member balance topped $500,000 for the first time in FY2012, with an average member balance of nearly $506,000. But the average is dragged northward by some individually very large SMSFs. The “median” super fund individual balance was more than $300,000 for the first time at around $302,000.

That makes the average SMSF member balance more than 17 times the average APRA-regulated member balance, which sits at just $29,000.

Both the average and the mean super funds have grown 12% over the four year period.

The average opening balance of newly opened SMSFs is now $181,000, with the average member balance being $83,000. That was at the point of opening the fund. The average SMSF balance for funds opened in FY2008 was $333,000 and at the end of FY2011 was almost $347,000.

One thing of concern to note is that there is a move towards SMSFs being set up with individual trustees.

On average, 75% of SMSFs have individual trustees. But of those new DIY funds opened in 2012, approximately 91% have individual trustees.

Most SMSF professionals will recommend a corporate super fund for several reasons and I back them. For a good understanding of the benefits of corporate trustees, see this article (Take your SMSF corporate).

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 director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• The Australian Prudential Regulation Authority (APRA) has issued a warning to banks that it views loans to self-managed super funds as more complex than traditional retail lending. In a statement issued to banks and building societies, APRA noted that the complexities of arrangements such as personal guarantees meant that “SMSF loans may have a different and potentially higher loss profile in comparison to standard loans” and that there is “insufficient empirical evidence as yet on the relative strength of the pledging arrangement or the ultimate enforceability of the personal guarantees in comparison to more traditional arrangements”. Craig Morgan, director of SMSF Loans, weighed in on the debate, saying that he did not agree with APRA’s assessment. “APRA’s concerns around enforceability are … viewed as extremely conservative,” he said.
• 2013 promises to be like no other year for SMSF auditors, accountants and advisers, according to the SMSF Professionals' Association of Australia (SPAA). Graeme Colley, SPAA Education and Professional Standards Director, says under new licensing changes being ushered in by the government: “it will be critical for specialist advisors to attain an appropriate level of competence regardless of which professional body they are affiliated with.” Auditors will have to make sure they get their application to ASIC by April so they can be registered in time for the 1 July start date, while accountants who provide advice on SMSFs will have to decide whether to apply for a limited licence that takes effect from 1 July or stay under the current system until 2016.
• In news sure to reassure SMSF members and trustees, APRA has released its latest report into the performance of the largest 200 super funds, and for the year to June 30 the average rate of return was just 0.5%. Returns according to APRA were well below the 10-year average, while discounting the years 2007-08 and 2008-09 the returns were the worst since 2003-03. Long-term returns were also weak as the global financial crisis years continued to impact the five-year and 10-year return data. Industry bodies have criticised the annual report as unhelpful.