Fleeing DIY Super ? Why Eureka Report members are turning away from SMSFs

PORTFOLIO POINT: Investors are moving away from SMSFs and into other areas is dramatic numbers. A subscriber survey tells why.

It’s official. One year after the Rudd government moved to “reform” DIY superannuation, Australia’s private investors are turning away from super in unprecedented numbers.

Dramatically tighter concession limits have choked what was the favourite saving and investment format for the majority of Eureka Report readers. The change will have a serious effect on the long-term savings rate on the nation and immediate repercussions on the investment patterns of private investors.

Last week we asked you why SMSFs were putting less money into super. Today we know the answer '¦ and it wasn’t because of uncertain financial markets.

The deluge of responses from readers made it abundantly clear that the single most important reason for the massive drop in contributions – from an average per fund of $43,800 to $34,200 – was a direct result of the government’s decision to stop Australians from taking advantage of superannuation.

Eureka Report subscribers are hopping mad at what they see as a politically motivated attempt to stop “the rich” from providing for their retirement. It’s a marked shift from 2007 when investors were able to boost their SMSFs with a one-off opportunity to contribute up to $1 million into super’s low-tax environment.

According to more than 100 readers who took the time to write to me in recent days (and please keep sending those letters please to bruce@castellanfc.com.au – SMSF trustees are now turning to margin loans, negative gearing and retiring debt associated with their business and investment properties.

What’s happened?

Back in 2008-09 the federal government decided wealthy Australians were putting too much money into superannuation.

In the May budget this was dressed up as part of the need to introduce “greater equity into the system by targeting reductions at those with relatively more private resources so the impact will be predominately on higher income earners”.

Sounds reasonable, doesn’t it? But the truth is that this was designed to hurt you, the SMSF trustee.

The policy materialised in a decision to drastically cut the amount of money that Australians could get into super through concessional taxation. The strictly temporary limit of $100,000 for concessional contributions for the over-50s was cut in half. And the limit for everyone else, of $50,000, was also cut to $25,000.

Except that it wouldn’t just hit “higher-income earners”.

As I warned at the time, Australians tend to back-end their super contributions: When the kids are out the door and the mortgage is paid off, super contributions tend to be pumped up.

This was perfectly summed up in the following communication from a reader:

“I am 74 and only have one more year of contributions. I was most irritated when the government halved the transitional contributions limits, limiting my ability to catch up and ensure I am fully independently funded. They had absolutely no thought about people my age having no chance to contribute again.”

It’s clear now the contribution cuts were too severe; put simply, the government went too far. In fact, this point was revealed when the then Prime Minister Kevin Rudd and Treasurer Wayne Swan admitted as much just a year later and after intense lobbying in the 2010 budget they decided to make an exception.

If a member is older than 50, they can continue to put $50,000 a year into super if their balance is less than $500,000. I covered this as the 50-50-500 rule in May this year (see Please explain, Mr Rudd).

In case you missed it, I detailed a tangible measure of the fall-off in superannuation contributions when I reported last week on a survey conducted by SMSF service provider Multiport of its 1200 clients.

The survey said that super contributions among those 1200 funds had fallen by 22% in actual terms between 2008-09 and 2009-10.

In real terms, the fall was much worse, perhaps as high as 28% – a staggering number in anyone’s language. Anywhere else in the superannuation sphere, a fall in contributions of that magnitude would be seen as a disaster.

For the record, last week I also asked whether there was more to it than just the changes to concessional contribution limits and offered up a number of possible explanations. But there were two that I missed that deserve mentioning.

The first was the pull-forward effect. Some said that when the 2009 budget changes were announced, they shovelled money into super in the last seven weeks of 2008-09, knowing they wouldn’t be able to use the same limits the following year.

The other reason was more positive: The government’s fiscal stimulus package contained a bonus 50% depreciation allowance for small and medium businesses to encourage investment. A few readers said they took advantage of this tax bonus, leaving them less money to put into super.

What you told us

Unequivocally, Eureka Report readers declared that they had no choice but to cut their contributions. An overwhelming majority were forced to cut by half. Here’s a selection of the responses:

DS: “My super contributions have halved because the Labor Party reduced the allowable contributions from $100,000 to $50,000 '¦ Prior to this I was fortunate to be able to salary sacrifice the majority of my salary. Have had to change the strategy, and now have a margin loan and pay that off outside super '¦ Can some lobbying be done to get this changed if there are lots of similar responses? I believe this is really very short-sighted on the part of the government.”

GE: “Reduced deductible contribution limit decided to reduce business debt levels”

JW: “My reason for reducing contributions relate to Labor Party tax policy. I view super as a tax strategy and I contribute up to my age-related limit. The tax advantages are balanced by the loss of freedom to access my money. [But now] I am favouring negative gearing over super. I figure '¦ that with interest rates of 6.5% and paying the top marginal rate, the effective interest on borrowings is 3.3%, which is not much higher than inflation. I know this isn't contributing to national savings but it's Mr Swan who has developed the flawed policy.”

KB: “I halved my contributions from $100,000 (2009) to $50,000 (2010) purely because the government changed the limit. If I had been able to, I would have contributed $100,000.”

K: “In my case (I am 57) it was the government's mindless halving of tax-deductible contributions that did it, from $100,000 to $50,000. It's that simple.”

The reduced concessional contributions would have been listed as the primary or secondary reason in 80-90% of those emails.

But it wasn’t the only reason. Many cited the economic slowdown’s impact on business profitability.

GC: “It is a direct result do the recession we did not have '¦ We could not get bank finance for projects. Sales slumped. Creditors clamped down. Expenses continue to accumulate.”

NO: “Prime reason for our lowering of contributions last year was economic: there just wasn’t as much money sloshing around.”

T: “A combination of triggers. Our own business has suffered a 15% drop in turnover for the year ended June 2009 and a further 15% drop to June 2010. To top that, July 2010 has been our worst month over the past five years '¦ a decision was made to not salary sacrifice but to retire debt we have outside of our SMSF.”

To read a wider selection of Eureka Report member letters, click here.

What happens next?

It is beyond doubt that superannuation is high on the government’s agenda. It gave three separate inquiries (Ripoll, Cooper and Henry) the power to look into super. federal Superannuation Minister Chris Bowen said his aim from those inquiries was to create “stable policy” that would not have to be changed by governments of either persuasion, for several years. Click here.

Cuts to concessional contributions and the lowering of the government co-contributions had already been put in place before those comments were made.

Meanwhile, the Coalition, led by Opposition spokesman Luke Hartsuyker, has said that it’s likely to overturn or not support most of the changes proposed by Ripoll and Cooper. Under these circumstances “stable policy” is extremely unlikely.

Part of the problem is that – with all policies that are essentially a form of means-testing – the government is taking a calculated risk that the “richest” 10–20% of the population never have and never will vote for Labor. (If that is the case, then the Coalition probably feels the same about the poorest 10–20%.)

Either way, now we know that you are shifting funds away from superannuation and with every letter we get a clearer picture of what alternatives you are beginning to explore.

Already we have a compelling indication you are putting money that may have been once tagged for superannuation into property, gearing up for a stockmarket ride or paying down debts. In the months ahead we’ll pay closer attention to these three areas of alterative investing activity you’ve highlighted as your new areas of interest, we’ll also report on every change that affects your savings – regardless of which party wins on August 21.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.