What SMSF trustees really need

What's that old saying – lies, dammed lies, and statistics. Well, here's a set of numbers that tell it as it is, and for SMSF trustees, especially those approaching retirement, they make for compelling reading.

The SMSF Association and the actuarial consultancy firm Rice Warner conducted some research into SMSF contributions and came up with some startling revelations. Some of it had been known anecdotally, but this 18-page report produced some hard data around SMSF contributions, both concessional and non-concessional.

To take the former first, it has long been the Association's argument that the concessional contribution cap should be at least $35,000, and that the carry forward of concessional contributions should be extended. This concessional cap is particularly important for people as they approach retirement. So, as the report shows, the Federal Government's decision to reduce the concessional cap to $25,000 will have a deleterious effect on those looking to have a secure and dignified retirement.

In 2015, the report pored over data from 14,351 members and 7593 SMSFs – valid and statistically significant numbers. What it found was that if the $25,000 cap had been introduced in that year, it would have affected 1983 members or 13.8 per cent of the sample – amounting to about $30 million in contributions for that year.

In respect to the carry-forward of contributions, the data shows that by extending the limit from $500,000 to $750,000, it would benefit 13 per cent of those surveyed, of which, and this is important, half would be women. Certainly it is a measure that would go a long way towards building adequacy for women in retirement.

The Association firmly believes that this change to $750,000 would increase the effectiveness of the Government's carry forward policy and deliver better results for people who have had volatile incomes throughout their careers and are trying to build adequate retirement savings.

What the report also shows is that an estimated 21 per cent of those surveyed in 2015 will be hurt by the Government's decision to limit the tax-free earnings in retirement to super account balances of $1.6m. Assuming an earnings rate of 5 per cent a year (generous in the current low interest rate environment), it allows people an annual income supported by superannuation of $80,000 a year. While a reasonable amount, it is a complex measure and refining the concessions for retirement phase could be done far more efficiently.

On the non-concessional front, the research conclusively shows that people only begin making significant voluntary contributions to superannuation from their mid-50s onwards. Commonsense suggests this would be the case – and now there is statistical evidence to support it.

The report argues this increase in non-concessional contributions later in people's working lives can largely be explained by three factors. First, most members will experience income growth over their career that will flow through as higher mandatory and voluntary contributions. Second, disposable income increases as mortgages are paid off and children leave home. Third, there is a strong tendency for members to connect more strongly with their superannuation funding adequacy as they approach retirement; it becomes a more immediate issue and access to the funds becomes more imminent.

To these three reasons, a fourth can be added. For women, in particular, who have often experienced broken work patterns, the latter stage of their working lives are uninterrupted, providing the opportunity to pour extra dollars into superannuation. Certainly the report highlights the fact that women's contribution patterns show that they are engaged with their superannuation in an SMSF, and this particularly applies when they are in the 60-plus age group.

None of this should be surprising. Earlier Association research undertaken with the Commonwealth Bank shows women, especially women in the SMSF sector, are increasingly confident of taking control of their superannuation. This particularly applies to Gen X and Y where women have had a career focus throughout their working lives and have the confidence and education to take control of their retirement income strategies.

In a very real sense, policymakers should take heart from these statistics. They suggest many people understand what is involved to be adequately prepared for their retirement years, especially when longevity is added to the equation, and are taking concrete steps to achieve this outcome.

What they need, and what only government can provide, is to have certainty around the superannuation system. So leaving individual policies aside, what needs to be done as the first stepping stone to providing this security is to have legislation that defines the superannuation objective. That's the challenge for our policymakers, because if they get it right it will give much-needed clarity to the policies required to achieve this objective.

Jordan George is head of policy at the SMSF Association.