Irked super funds let fly at DIY crowd

I don't much care for conspiracy theories, but all this talk of self-managed super funds rorting the system smacks of sour grapes on the part of the big super funds.

I don't much care for conspiracy theories, but all this talk of self-managed super funds rorting the system smacks of sour grapes on the part of the big super funds.

Big super has long decried the growth in self-managed funds, which it claims are sold to people who don't have enough money to justify them, who don't understand the responsibilities they're taking on and don't have the skills to manage them.

In short, they reckon these DIY jobs are stealing customers who would be much better served by staying in a "proper" fund.

Both industry and retail funds, which usually couldn't agree on the time of day, are irked by the fact that self-managed super is the fastest-growing sector of the industry, with almost one-third of super assets.

While their members have average account balances of about $20,000 to $25,000, the average self-managed fund member has about $470,000 in their account and the average fund has almost $900,000.

And as if these bloated account balances weren't enough cause for resentment, self-managed fund members are an independent lot who blithely make their own decisions on their savings, ignoring the conventional wisdom of the traditional money managers. They hold more cash than the average fund. They like to own shares direct, which further irks the big fund managers, who would like them to outsource their share investments.

They're not big overseas investors but they are showing an increasing interest in alternative assets such as art and collectables and, more recently, property. Of course, some are playing the system. Cheating has been around since before taxes were invented and it is the Tax Office's job to find and prosecute these wrongdoers just as it tracks down corporations that play loose with the rules or individuals who have forgotten to declare bank interest.

But to label self-managed funds as the tax-avoidance vehicle of choice is pure political spin.

The irony is that this government has already done much to rein in abuses of the system.

It has introduced tougher rules on investing in assets such as art and collectables, making it clear you can't put them on display at home or in the office.

It has introduced new rules requiring regular valuations of fund assets and it is giving the Tax Office new powers to prosecute wrongdoers. Self-managed funds have also been hit by broader changes. In its past budget, the government abandoned plans to allow people aged over 50 with less than $500,000 in super to continue to receive concessional contributions of up to $50,000 a year, instead limiting them to the general cap of $25,000.

This, it said, was a temporary cost-cutting measure but you wouldn't want to bet your house, or even next week's coffee money, on it not being permanent.

That $500,000 proposed cap, according to many in the industry, isn't workable and the government knows it.

The lower contributions cap limits the amount you can build in super and has also taken some gloss off transition-to-retirement strategies, which allow people over 55 who are still working to draw down a pension from their super. Thanks to tax rate arbitrage, they need less income to maintain their standard of living (as the super pension is concessionally taxed between 55 and 60 and tax-free once you turn 60), which in turn allows them to salary sacrifice more of their wages into super, thus building their account balance.

That strategy was like manna from heaven for high-income earners when the over 50s could contribute up to $100,000 to super each year. And it was still attractive when they could contribute $50,000. There are still benefits with a contributions cap of $25,000 but they are much more modest.

Ironically, those lower contribution caps are also a big reason that more self-managed funds are looking to take advantage of rules introduced by the Coalition government that allow them to gear into property. With retirement looming, many underfunded baby boomers want to get as much money into super as they can.

And if they can't do it through salary sacrifice, they'll do it through gearing. This is one area where the naysayers have a point.

Super funds are generally prohibited from gearing and, until they saw it, most people assumed the Howard government's rule change would simply clarify the legal position on investing in products such as instalment warrants that were based on a limited-recourse loan. (That means the lender has the right to claim the investment it lent against only if it goes belly-up it doesn't have rights to any other assets.)

Instead, it went further and allowed self-managed funds to use limited-recourse loans to gear into other investments such as property.

This isn't a problem if the strategy is used conservatively.

However, it has opened the door for a wave of property spruikers to flog their off-the-plan units and other "great investments" to the self-managed fund market.

Despite evidence that this is a disaster waiting to happen, the government has done little to protect retirement savings in this area.

Twitter: @sampsonsmh

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