The Weekend Australian, July 30, 2016:
An increasing number of people with self-managed superannuation funds are worried that they won’t have enough money for a comfortable retirement, according to a new survey by the SMSF Association.
It shows that the proportion of people with SMSFs who won’t have enough money for a comfortable standard of living has risen from 25 per cent to 30 per cent over the past year.
The Association defines a comfortable living in retirement as about $59,000 a year for a couple at aged 65. It estimates a combined balance of just over $700,000 is needed to deliver this income level.
On the plus side, the association says most people with self- managed super funds are still headed towards retirement with the prospect of earning enough for a comfortable retirement.
“The research highlights the fact that, even in the face of uncertain and lower-yielding investment markets, the SMSF sector still provides the best option for people to enjoy a dignified and secure retirement,” SMSF Association chief executive Andrea Slattery suggests.
“But the fact that there has been a slight growth in the number of trustees who can’t be confident of achieving their lifestyle goals is a cause for concern,” she said. “It highlights the need for them to get specialist advice.”
Slattery says the key questions are these:
- How much to spend each year in retirement.
2 How to meet essential expenditures.
3 Finding the correct adjustment to asset allocation in the light of potentially lower-yielding markets.
The survey has been done in conjunction with SMSF retirement specialists Accurium.
“Our research shows that people with SMSFs are generally well prepared for retirement,” says Accurium’s senior actuary, Douglas McBirnie.
“However, lower expected investment returns mean that trustees need to review their retirement plans to ensure their capital remains sufficient to support their retirement plans.”
SMSF returns are dropping
The survey shows there was a medium investment return for a two-member SMSF of 4.2 per cent for the year to June 30, 2015, down from the 6.2 per cent average return recorded by SMSFs for the previous five years.
According to Mr McBirnie, “The current lower-return environment means retirees need more in savings to achieve their retirement goals.
“Our estimate of the amount a 65-year-old couple needs in retirement savings to be reasonably confident of affording a comfortable retirement has increased to $702,000.”
He said an analysis of the detailed retirement spending plans for SMSF households showed their desired spending level was $75,000 a year for a couple, with about 30 per cent planning to spend more than $100,000 a year per couple.
Accurium estimates that it would need a combined super balance of almost $1.9 million to support this level of income.
The survey shows the median balance for a two-member SMSF has risen to $1.12m.
The report comes as many people with self-managed super funds are bracing themselves for the federal government’s proposed superannuation changes.
The survey shows a substantial number of people with SMSFs will be affected by the changes, which include a cap of $1.6m that can be transferred into a super account with no tax on earnings.
The earnings on balances over this level will be taxed at 15 per cent.
The government is also moving to cut the level of concessional contributions to superannuation from the current $30,000 a year — and $35,000 a year for people 50 and over — to $25,000 a year.
The survey shows that 19 per cent of self-managed super fund trustees over 65 had balances larger than the federal government’s proposed $1.6m cap.
About 8 per cent of two-member SMSFs had both members with super balances of more than $1.6m.
No evidence of widespread estate planning
The report notes that less than 20 per cent of people with a self-managed super fund were planning to use their superannuation savings to provide a bequest.
“This helps to dispel the myth that SMSFs are commonly used as estate planning tools,” Mr McBirnie said.
“Eighty per cent of SMSF trustees do not intend leaving any form of inheritance for their families, contrary to the widely held belief that bequests are central to SMSF retirement plans.”
Federal treasurer Scott Morrison has repeatedly said that superannuation tax concessions should not be used for estate planning, using concern over this motive as a reason to claw back the super tax concessions.
But the survey shows that most SMSF trustees are hoping to use their superannuation savings to fund their own retirement.
Almost 60 per cent of SMSF trustees made concessional contributions to their superannuation above the mandatory 9.5 per cent during the year to June 2015.
Some 31 per cent made concessional contributions above $25,000 a year during the year.
The report says that despite the proposed changes, self-managed super funds will remain an attractive environment for retirement changes.
The proposals, which still need to be legislated, are set to come into force from July 1 next year, except for the $500,000 lifetime cap on post-tax contributions dated from July 1, 2007, which came into effect from budget night this year.
It is argued that the 15 per cent tax rate on earnings from super balances above $1.6m is likely to be more beneficial than taking the money out of super altogether.
The survey also shows that while investment returns are falling, people with self-managed super funds have not adjusted their retirement spending plans downward.
“The SMSF trustees in our study may not be adjusting their spending levels to match their means,” Mr McBirnie said.
“This presents a real opportunity for SMSF practitioners to help their clients optimise their retirement plans.”
The report notes that 48 per cent of the SMSF trustees surveyed would have been hit by the proposed federal government changes had they been in place in the financial year to June 30, 2015.
By July 1 next year, with higher balances at stake, the proportion could be expected to be noticeably higher.