SMSFundamentals | Mar 06 2014
SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.
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By Greg Peel
MLC recently surveyed 2000 Australians and found 32% expect to suffer a large financial shortfall at retirement and a further 25% expect a shortfall to some extent. Put the other way around, the numbers imply 43% of Australians do not think they will have a shortfall, but then what is a shortfall?
Most alarmingly, only 3.5% of those surveyed believed they will have enough money to maintain their lifestyles in retirement.
There are now close to one million Australians with self-managed super funds (SMSF) and around half of those are in the pension phase. Vanguard/Rice Warner recently surveyed 320 retired SMSFs and found 90% of them are comfortable with their current financial position and 85% expect to be comfortable over the next five years.
A simple conclusion to draw here is that an SMSF all but guarantees financial comfort in retirement. That is a dangerous simplification. Perhaps we can, nevertheless draw the implication that “doing something about” your own super (and clearly self-management is indication of proactivity) is more likely to set you in good stead than not doing anything about your super plans other than paying compulsory contributions into a super fund.
The demographic reality is that those starting out with more money – higher incomes and more assets – are likely to end up with more money, and that those with more money are more likely to look to managing their own retirement planning. SMSFs are not viable for those below a certain wealth level. The MLC quarterly survey found term deposits and paying off debt continue to be the two top investment priorities among the sample set of the general population, but a growing appetite for direct share investment was noted for those on incomes between $75-100,000 per annum.
This article is thus not intended to imply an SMSF can turn the poor into the rich at retirement by magic. But the survey findings should be interesting for those of sufficient means who don’t have an SMSF or reassuring for those who do but are not yet retired. That said, an SMSF is all about taking on and managing one’s own risk.
The Vanguard/ Rice Warner survey noted 76% of the retired SMSF respondents declared savings of $1m or more. 94% nominated their significant concern was investment and associated risks. 70% indicated they are somewhat or very concerned about a share market or economic decline. 88% are concerned about the risk of possible changes to superannuation and/or tax law.
Retired SMSFs have on average a much lower allocation to residential and commercial property than non-retired SMSFs, and a very low level of property gearing. 96% own their own home outright.
Allocation to cash and term deposits is 21%, and allocations to managed funds and trusts, both listed and unlisted, has increased since the previous year’s survey. 30% either own or plan to own exchange-traded funds (ETF) exposed to the Australian market and a similar percentage own or plan to own ETFs exposed to overseas markets.
80% said they were aware of but not interested in annuities.
Presumably the vast majority of SMSFs seek professional advice. Indeed, advice is fundamental to both SMSFs and those invested in regular super funds. This is the finding of research conducted by Core Data, directed not at trustees but at super fund managers themselves (and presumably the growing cohort of SMSF management service providers).
65% of pre-retirees that do not seek professional advice are unsure or believe it’s unlikely they will achieve the level of wealth they require in retirement, Core Data has found. In terms of sticking with a particular super fund, advice is considered by members aged 45 and over to be one of the key retention tools that can be adopted by super funds and once of the most valued services.
48% of advised pre-retirees say they are likely or highly likely to achieve their level of wealth required in retirement while only 35% of those unadvised say the same.
The services most valued by both pre- and post-retirement members are financial advice (60%) followed by financial counselling (55%). Only 13% of members retaining a financial advisor retain an advisor from inside their super fund as a primary source of advice. Indeed, only 40% of members use their own fund’s advice services.
The Core Data research is clearly intended as a wake-up call to super funds to better address their advice offerings.
We may look at it from a different angle. It’s no great shock super fund members seek independent advice outside their own super fund. This is a sensible approach. The great explosion in SMSFs occurred after the 2002-03 stock market downturn that exposed the level of fees, commissions and advisor kick-backs were prevalent in the super industry.
The bottom line is that whether you have an SMSF or a regular super fund, you stand a much better chance of reaching your retirement goals if you keep yourself informed and seek external, independent advice.
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