If you were thinking of starting a self-managed super fund and you have less than $2 million to invest, then you should probably forget about it.
That is the conclusion drawn from new research produced by Industry Super Australia. Funds with less than that princely sum are likely to be “performing well below their APRA-regulated counterparts, said ISA chief economist Stephen Anthony.
Using the most recent Australian Taxation Office data, ISA researchers found that the average net return for an SMSF in 2015 was only 6.2 per cent.
This compared to 8.8 per cent for an APRA-regulated fund, and, within that pool, 7.8 per cent for a retail fund and 9.7 per cent for an industry fund.
The analysis also revealed that SMSF performance varied widely according to size. Funds with fewer assets performed significantly worse than those with more assets. Returns ranged from minus 16.9 per cent for funds with less than $50,000 in assets to 7.7 per cent for funds with over $2 million.
Stephen Anthony described the findings as “the hidden story of self-managed super funds”.
“The perception that there’s little difference in the performance outcomes of APRA-regulated and self-managed super funds is false,” Mr Anthony said. “A self-managed super fund with less than $2 million in assets is unviable as a retirement savings vehicle”.
Despite their seeming under-performance, data shows SMSF membership is on the rise. The latest figures from the APRA show that the number of SMSFs role 4.1 per cent to 585,000 in the year to December while their assets were up 8.3 per cent to $653 billion, making them the largest single group in overall assets.
Industry fund assets grew the most over the period, up 12.3 per cent to $500.6 billion. The retail fund sector saw assets rise 5.42 per cent to $569.7 billion while corporate fund assets grew 6.4 per cent to $54.1 billion.
ATO figures show that SMSFs are gaining traction among younger people aged between 35 and 44. The median age of a newly established SMSF member dropped to 48 years in 2014-5 (the latest year available) compared with 55 five years earlier.
Mr Anthony told The New Daily that there appeared to be a lack of expertise exhibited by some with SMSFs. ISA research last year identified SMSF members as having low financial literacy, high confidence and strong links to financial and tax professionals.
“SMSF sector growth is being driven by sales efforts. It’s important that consumers look at the returns and fully understand what they’re signing up to,” Mr Anthony said.
Overall SMSF returns may be even lower than those shown by the ATO figures. That’s because a higher proportion of SMSFs are in pension phase, meaning they pay no tax on earnings or pension payments.
Industry and retail funds are more likely to be in accumulation phase and therefore paying tax on earnings. If that difference was balanced out SMSF returns would be lower because they would be exposed to higher tax rates.
However women appear to be doing better through SMSF’s than men with their funds achieving a five-year growth rate of 24 per cent compared to 17 per cent for men according to the ATO figures.
Men still have the upper hand on balance size with an average balance of $633,000 compared to $498,000 for women. The average SMSF balance is now $1.1 million, the ATO revealed.
Mr Anthony said that 80 per cent of SMSFs had less than the $2 million threshold his research showed as indicating viability in comparison with other fund types.
There is evidence that SMSF owners are being targeted to buy geared property, Mr Anthony said. This could be dangerous in an elevated property market and “you’d have to ask whether buying existing properties is what super is there for,” he said.
*The New Daily is owned by industry super funds