Industry superannuation fund or SMSF? How to gauge what’s best for you.
For today’s Australians, their retirement experience will be entirely different to that of their parents.
The two key reasons why
Firstly, people live for many more years into retirement, which means retirement really is a “Third Age” where much more quality living can be enjoyed. Australian men aged 65 in 2015-16 can now expect to live for another 19.2 years, while for women the figure is an extra 22.1 years. And, of course, it needs to be funded.
According to the Australian Bureau of Statistics (ABS), the average age at retirement for people 45 or over in the past five years is 61.5. Of the 1.5 million men who retired, a quarter left the workforce when they were under 55, half between 55 and 64 and a quarter after 65. Of the 1.9 million women, half retired under 55, just over a third left between 55 and 64 and nine per cent when over 65.
The second big difference is that earlier generations relied on the federal government-funded age pension in their later years.
Of the 3.3 million people 45 or over who retired, two million or 61% made contributions to a superannuation scheme.
Today, Australia’s compulsory superannuation savings system is 23 years old and in the next few years people who retire will have been in that system all their working lives.
Many will still rely on a reduced age pension – and get the cheap medicines and health care associated with it – but for more and more people, superannuation will fund the major part of their retirement years.
ABS figures tell us that of the 3.3 million people aged 45 or over who retired, two million or 61 per cent made contributions to a superannuation scheme. Of those who did, 55 per cent received all or part of their superannuation funds as lump sums (54 per cent of men and 57 per cent of women). Many used them to pay off or improve their home, buy a new home or buy or pay off a motor vehicle. Some reinvested in a bank account or approved deposit fund, deferred annuity or other form of superannuation – but more than 60 per cent said they now relied on a government pension to fund their retirement.
Many people do not engage with this issue until late in their careers as retirement looms: for those, the federal government recently created MySuper. These are low-fee accounts with moderate-risk investment strategies designed for people who have a “set and forget” attitude to their retirement savings. At some point most will take a greater interest in their super and want greater engagement, more control and to make their own decisions on strategies and pension-phase outcomes.
Most superannuation funds offer investment strategies to suit people at different stages. A young person, for example, is likely to favour a more aggressive investment strategy than someone approaching retirement, for whom preserving the lump sum is the priority.
Over the past two decades many Australians have opted to create their own superannuation funds, leading an explosion in the number of self-managed funds (SMSFs). While many wanted greater control over their super, others – particularly small business owners – wanted the significant advantages available under an SMSF, such as having the fund own business premises or buy life insurance for members. Up to four members are permitted.
Many people turned to SMSFs when they saw their retirement savings slashed by low returns and hefty fees during and after the global financial crisis of 2008: they decided they could do as well, if not better, managing their own money.
In 1994 there were about 80,000 SMSFs. Now there are more than 500,000, with $543 billion in assets. Unlike industry and retail super funds, which are regulated by the Australian Prudential Regulatory Authority, SMSFs are regulated by the Australian Taxation Office. There are strict reporting, auditing and compliance rules, and a whole service industry has developed for SMSF trustees who want to outsource the more complex operational tasks. The financial advice industry is also closely engaged with the SMSF sector. At the transition to pension point, many people buy an annuity, which guarantees an income stream for the rest of their lives, and supplement that with investments that can also remain inside the original SMSF.
Retail and industry funds (see here for definitions) have responded to many of the innovations people found attractive in SMSFs and have renovated the products (and fees) they offer to the public. Superannuation is no longer a “one size fits all” issue – but for people who wish to engage closely with their super, particularly via an SMSF, the onus is now on them to make the right choices and investment decisions to fund their “Third Age”.