- One in five SMSF trustees are considering moving to a superannuation fund.
- Part of the important role of SMSFs is providing members with a super platform for life.
- SMSFs can give accountants high visibility over important parts of their clients’ long-term finances.
By Sam McKeith
Self-managed superannuation funds (SMSFs) in Australia and trusts in New Zealand have long been considered a smart way to save for retirement. However, both appear to be losing some of their lustre.
Recent Australian research revealed one in five SMSF trustees are thinking of ditching their DIY super and moving to a superannuation fund instead. Reasons for the trend away from SMSFs, according to the 2019 Vanguard/Investment Trends SMSF Report, include high fees and trustee concerns about the level of service they get from SMSF professionals.
But that’s not how Heffron Consulting Managing Director Meg Heffron sees it, insisting that SMSFs remain a key component of Australia’s superannuation system, with a “core role” to play.
SMSFs are a ‘platform for life’
Part of that important role is SMSFs providing members with a super “platform for life”, which can be a benefit of SMSFs that’s easily overlooked, says Heffron, an SMSF specialist based in Maitland, NSW.
While independence, control and the flexibility to tailor investments to personal circumstances are the commonly cited upsides of SMSFs, it’s this more fundamental characteristic of the retirement vehicle that she calls its “real hidden benefit”.
“The often-underplayed benefit of an SMSF is its longevity as a structure,” explains Heffron. “We also know that we’re going to have super from [age] 25 to hopefully 85, and over that time things will change enormously.
“The thing an SMSF gives you, from whenever you kick it off to whenever you die or wind it up, is you can at least keep one thing constant – and that is the legal structure in which your super is owned.”
That’s no small thing, says Heffron, as it ensures SMSF members get access to benefits flowing from legal changes to the super industry over time.
“Once you have an SMSF, you don’t need to change super funds again so you’ll never miss out on grandfathering. You’ll still be in the fund you’re in when that happens.”
“Once you have an SMSF, you don’t need to change super funds again, so you’ll never miss out on grandfathering.”
‘Visibility’ on retirement savings
Another underappreciated advantage of SMSFs is their ability to give accountants high visibility over a “really important part of the client’s long-term financial affairs”, says Heffron. This is particularly relevant in the context of COVID-19, which is pushing accountants to be across the totality of their clients’ financial health.
“If accountants were ever having a crisis of confidence about the value they add, I bet they don’t feel it right now,” she says. “They have become the unpaid counsellors of the entire business community.
“What they are doing with the JobKeeper payment scheme, etc., is what they do with SMSFs all the time: accountants being the guys who have to know how the rules work, who have to know what strategic opportunities clients have available to them, and to make sure they are the ones who are there first.”
Irrespective of such benefits, the Vanguard/Investment Trends report, released mid-2019, suggests there is considerable uncertainty about SMSFs among trustees.
In addition to finding that many trustees are considering abandoning SMSFs, it found the total number of SMSFs grew to about 598,000 at the start of 2019, up just 2% from the same time the previous year.
The report, which collated responses from almost 5000 SMSF trustees and close to 300 financial planners who advise SMSFs, also found the then A$747 billion SMSF sector in Australia was growing at a slower pace than the preceding 12 months.
Skip forward to March 2020 and the number of SMSFs sat at 596,180, a tiny 1.7% lift from March 2019, according to figures from the Australian Prudential Regulation Authority (APRA). And the value of assets held by SMSFs was hit by the COVID-19 fallout, shrinking from A$745.3 billion in December 2019 to A$675.6 billion in March 2020.
SMSF establishment rate ‘not a sign of success’
Tony Negline CA, Australian Superannuation Leader at Chartered Accountants Australia and New Zealand, however, cautions against reading too much into such research. In his opinion, looking at the establishment rate alone is not a “sign of success in the sector”.
“The sign of success of any superannuation sector is whether it achieves what it needs to for the people who belong to it. Just to look solely at the number of funds that have been created is, I think, unbelievably simplistic,” he says.
While there are only about 1.1 million SMSF members in Australia, the sector punches well above its weight in the superannuation industry, says Negline. “The sector has the smallest number of members of all the five superannuation sectors [retail, industry, public sector, corporate, self-managed]. No-one quite knows where the dollar value of assets is, but SMSFs are quite close to the top.”
“SMSFs have had, by a long margin, the smallest number of members, but almost certainly either the largest or second largest asset pool of all sectors. Isn’t that a better measure of whether a sector is actually working for people?”
Why do trustees exit SMSFs?
When it comes to a possible perception problem about SMSFs, Negline urges accountants to be proactive in helping clients run their funds better, especially in the midst of COVID-19 uncertainty.
This assistance, he says, can include accountants working with clients on compliance with super laws, tax laws and discussing with them, “in broad terms, asset allocation”.
“They can’t talk about specific financial products, such as specific stocks. They can’t talk about specific managed funds. They can’t talk about specific bank accounts. But they can talk about things in general terms and they can help their clients to a greater extent than they typically think they may be able to.”
SuperConcepts’ Annette Sheppard, too, warns against drawing overly broad conclusions from industry research, pointing to several reasons trustees consider moving out of SMSFs.
Indeed, Brisbane-based Sheppard, General Manager Growth at the SMSF services provider, points to a “multitude of reasons” beyond dissatisfaction for trustees contemplating a switch to a superannuation fund.
“It’s not just the fact that they don’t like an SMSF,” she says. “It could be that their personal circumstances don’t warrant one any more. It could be failing health – we have an issue with people with dementia – or it could be bankruptcy or a divorce.
“As an SMSF administrator, we encourage and promote our trustees to constantly assess their desire and ability to manage an SMSF; that’s a healthy thing.”
And APRA data suggests no fall-off in enthusiasm for SMSFs by trustees, she says.
“According to the most recent APRA figures, 25% of superannuation members are still selecting SMSFs as their preferred retirement savings vehicle. Out of those, 74% are aged 50 or over. So, it’s healthy numbers.”
“25% of superannuation members are still selecting SMSFs as their preferred retirement savings vehicle.”
Number of trusts set to fall in New Zealand
Meanwhile, in New Zealand, where servicing trusts is a part of the business of many CAs, law reform is set to radically to change the way assets are managed from 30 January 2021.
While New Zealand’s Ministry of Justice puts the number of trusts at between 300,000 and 500,000, that’s expected to fall sharply once the reforms, partly aimed at making trusts more accessible to both lawyers and the public, kick in.
Henry Stokes, General Counsel at Perpetual Guardian, says the new legislation targets people that have established trusts “for reasons they shouldn’t have been set up for. The changes are clarifying and give certainty to having really good reasons for having a trust,” he says.
The problem is, with many accountants focused on helping clients navigate the economic fallout from COVID-19, it’s easy to overlook the looming changes. That could lead to potential problems down the track.
“Now is definitely the time for action. Even if you’re going to keep your trust, you still need to be reviewing it now. The moment 30 January kicks in, you need to have already complied with the new requirements,” says Waikato-based Stokes.
“The message that we and the trustee industry have been giving is that it’s prime time to have a look at your trust. Do you really need it? Do the reasons why you set it up still exist due to the changes in law?”
Among the changes set to take effect are legislated descriptions of key features of a trust, to help people understand their rights and obligations, and mandatory and default trustee duties, to help trustees understand their obligations.
The new laws also include requirements for managing trust information and when to disclose it to beneficiaries, so they are aware of their position.
Stokes says that adding to the pressure on professionals advising clients about the changes is that many people like to talk in person when it comes to issues related to trusts.
“We were contacting people during our lockdown period and saying we can talk about this over the phone or we can do it through Zoom, and some people took advantage of that, but others wanted to talk face to face,” he says.
“It’s understandable, but then it pushes the time even more because the thing with trusts is that they aren’t fast-moving vehicles. As much as people would like them to be, they’re just generally not.”