Are self-managed super funds causing a property bubble by buying up real estate?
Duncan Fairweather wrote a great article in the SMSF Advisor pointing out that some people have criticized the SMSF sector but it’s been based more on ideology and heresay rather than reality and facts.
The increase in the number of self-managed funds is indicative of Australians desire for choice and self determination rather than by government policy direction.
Duncan states that sometimes we forget that Self-managed funds enable people to make themselves financially independent in retirement and avoid reliance on the age pension.
Generally SMSF members are achieving this goal while the members of the large industry and retail funds are not.
The average balance in a self-managed fund account is over $500,000 compared with average account balances in industry and retail funds of less than $30,000.
Whist the criticism is that the higher balances in SMSFs result from wealthy people maximising their concessional and non-concessional contributions and from the returns generated by their assets.
Yet the ATO statistics show that 66 per cent of SMSF members are on incomes of less than $80,000.
Self-managed superannuation is enabling a generation of Australians to fund their own retirement at old age, instead of leaving a liability for the next generation.
The fact that a million Australians, with more joining every day, are willing and capable of taking charge of their retirement savings, and doing a good job of it, is to be applauded.
However, it seems success breeds envy and draws criticism.
You’ll hear it said that self-managed funds are driving up property values, distorting capital allocation, investing too conservatively, investing recklessly, straining the Budget, getting an unfair tax advantage and are costly to run.
Let’s look at each of these claims as they are often driven by ideology, self-interest, or are just plain wrong.
(1) SMSFs are used to gain an unfair tax advantage
Members of self-managed funds are subject to exactly the same tax rules as members of pooled super funds.
Critics are quick to point out the top 20 per cent of income earners get the lion’s share of super tax concessions but they don’t always acknowledge that the top 20 per cent also pay the lion’s share of income tax.
They get 57 per cent of the tax concession but pay 64 per cent of income tax.
So as you would expect, the value of their super tax break is proportionate to the amount of tax they pay, and actually a bit lower.
(2) Super tax concessions are an unsustainable drain on the Budget
Tax incentives to save for retirement are sensible policy because in the long run it’s cheaper than paying out the age pension.
If super tax incentives are reduced, less will be saved, fewer people will be financially independent and more will have to rely on a full or part taxpayer-funded pension.
Are SMSFs too costly to run?
It’s true that a relatively low account balance in a self-managed fund will cost more to administer than one held in a pooled super fund. But above around $100,000, costs are comparable or much lower.
Two-thirds of self-managed funds have an operating expense ratio to assets of less than 1 per cent and 40 per cent have an expense ratio of less than 0.25 per cent.
It’s not just about cost.
The main reason people set up self-managed funds is to take control of their savings and more are doing so relatively early in their working lives.
They make a commitment to save and as they build their assets, the relative cost of running their fund comes down.
They are being helped by the emergence of a range of low-cost, online fund management service providers.
The real cost issue in superannuation is the fees charged by the large industry and retail pooled super funds, which are estimated to have consumed a quarter of these funds’ returns in the past decade, a cost borne by their members.
(3) SMSFs drive up property prices through highly leveraged investment.
No hard evidence is presented to back up this claim.
Very low interest rates and an inadequate supply of new housing is likely fuelling property prices more.
SMSFs actually put quite a small proportion of their assets into residential property – around 3.5 per cent and this has been steady for five years.
They put three times as much into commercial property, often linked to the owners’ business.
Those starting a SMSF to borrow to buy a residential property and having one highly leveraged asset is clearly not a sensible strategy.
Perhaps it should be managed through better advice, credit restraint by lenders and regulation of property promoters.
Perhaps forcing SMSFs to keep to a lower Loan Value Ratio is better than simply throwing the baby out with the bath water.