SMSFs with less than $2 million in assets are “not viable retirement savings vehicles”, says Industry Super Australia in a new report.
Industry Super Australia (ISA) says members in SMSFs with less than $2 million are worse off than members in APRA-regulated funds, based on an analysis of the ATO’s recently released 2015/16 statistical overview of SMSFs.
Industry Super chief economist Dr Stephen Anthony said the data suggested SMSFs work for high wealth individuals, while casting doubt over the suitability for most Australians.
“SMSFs with assets over $2 million on average generally performed on par with APRA regulated funds and underperformed industry funds, but medium to smaller ones showed appalling returns,” he said.
“The pattern is clear: the less you have, the worse you perform.”
“It’s important to know how your super fund stacks up on fees and net returns – otherwise you could be in for an unpleasant surprise.”
The ISA report agrees with the ATO’s finding that SMSFs and APRA funds had the same investment performance in 2015/16. However the report also finds that SMSFs under-performed industry funds over the same period, on average. There were also considerable differences depending on the size of the SMSFs, with negative returns for SMSFs with less than $200,000 in assets. Whereas SMSFs with over $2 million in assets outperformed the average industry fund.
“Examining the data closely, persistent poor performance, particularly for SMSFs with balances less than $200k, reflects a combination of factors including high level of asset concentration, high administration and investment costs,” says the ISA report.
“Whilst larger SMSFs benefit from scale, smaller and newly established SMSFs continue to suffer from high upfront cost and high expense ratios. Double-digit negative return appears to be the norm for SMSFs less than $50k balance.”
The research also finds that smaller SMSFs continue to lack diversification, with 60% of funds with balances under $100,000 having 80% or more invested in a single asset class – likely cash, domestic shares or commercial real estate.
Industry Super Australia says the “surge” in LRBAs, and the resulting asset concentration, threatens financial stability, presents risk management challenges and could be exacerbating the “boom-bust property cycle”.
“LRBAs have the potential to cause significant losses for member’s retirement savings and threaten the nation’s financial stability should property prices collapse in our major capital cities.”
“This investment vehicle has been heavily promoted by commission driven real-estate promoters and tax agents as a tax-advantageous way to invest in property. Surging interests in LRBAs has raised serious questions regarding their role in inflating property prices and exposing members’ savings to the volatile property market.”
Industry Super Australia says that LRBAs, which are used by SMSFs but not industry funds, “must be abolished or curtailed” to secure member’s retirement savings.
The Federal Government has been moving to include LRBAs in the calculation of Total Superannuation Balance, the complexity of which has been criticised. Industry Super Australia welcomes the proposed changes as a “step in the right direction” to curb LRBAs.
The ATO warns, in its statistical release, that “care must be taken when using SMSF performance figures, particularly when making comparisons”.
“While the methodology used to estimate SMSF performance resembles APRA’s methodology, the data collected is not the same”. This issue is not directly addressed in the Industry Super Australia report.