The Topic:Self- Managed Superannuation Funds (SMSFs) have grown dramatically in recent years. Why? Where are SMSFs investing their funds?Why do you think this is? What are some potential risks of the investments of SMSFs compared to other types of super Essay Example
The superannuation and banking sectors combined dominate the Australian financial system. Superannuation assets as a share of GDP has increased twice the original value sin the completion of Wallis Inquiry in 1997, to be currently over 100 per cent. This paper discusses superannuation fund and the SMSF in specific. The paper discusses the factors that have contributed the rapid growth of the funds and why most people have chosen to invest in it and not other funds. The paper ends with the conclusion.
Since the completion of the Walli’s inquiry in 1997, the assets of Superannuation assets and shares have more than doubled and by December 2013, it was 100% double (Ashcroft 2009). This increase is because of many factors, which have resulted into the growth of the sector and the fund in specific. Some of the factors include the tax incentive adopted by the Australian government, compulsory SG, and the drastic changes in the retirement’s lifestyle expectation (Ashcroft 2009).
It can be noted that the Superannuation system changed for as long Period and a drastic shift away from DB scheme towards DC scheme, with most of DB schemes shares moving downward (Antolin et al 2009). The decline in the DB scheme has coincided with the decline with the shares of Superannuation funds held by the public sector has most of the shares are currently owned by private investors (Antolin et al 2009).
In the superannuation industry, in Australia, self-managed superannuation is the fast growing segment. in the year 2013 the fund was around $ 500 billion in assets only, and that composed of over one third of the total industry assets that currently stands at over $ 1.6 trillion that is an increase from 19995 from 9% to 20% equivalent to 30% increase in the real GDP (ABS 2013). The superannuation accounts also increased drastically having double for the last few decades (ABS 2013). The drastic growth in the Superannuation industry has been because of strong legislation that has supported its growth over many years. Some of the reasons of rapid growth include:
The introduction of the law that allows employees to choose the fund that their employers can deposit their contribution and the fund they can use has assisted the employees to choose SMSF. This law has also made it more flexible for the people to choose SMSF contributing to its rapid growth in the past decades. The choice of the benefit payments also played a crucial part in the growth of superannuation fund and asset. If the benefit payments were taken as a form of an account-based income stream, then the assets will stay longer on the superannuation system while the benefit taken as a lump sum payment which will remove the asset from the system quicker. Since the introduction of this law, many have chosen income stream, benefit payment, as opposed to lump sum payment hence increasing the asset growth (ABS 2013). For SMSFs almost 70% of the benefits payments are in the form of the income stream whereas for other funds, income stream currently account only 40% of the total benefit payments. As a result, the share of superannuation assets held in MSMSFs increases, then it is likely that the proportion of benefit payments taken as an income stream will also automatically continue to increase explaining high growth rate in superannuation funds (ABS 2013).
In July 2007, the law that simplified the superannuation fund came into effect. This law majorly eliminated the taxes that were payable on the retirement benefits, and this encouraged many people to save more and more since their savings were not subjected to any tax. The tax was eliminated from members who were 60 years and above. The legislation further introduces the cap on after-tax superannuation contribution. The law set it at $ 150,000 above which the normal contributions are taxed and are at the top of marginal tax rate. During the transitional period, the legislation also allowed individuals to make a contribution of up to $ 1 million in after tax contribution. The legislation came as a reprieve to the members and a motivation, as a result; there was drastic in member’s contribution to SMSFs in 2006- 2007 and the assets in the sector shifted upwards.
The law, which changes over the past few years concerning the management and investments in the Superannuation sector, increases the accessibility and attractiveness in the investment, in the sector more so in property investment via an SMSF and this was a strong motivation for people to invest in the sector. Especially young people were attracted and heavily invested in the sector.
Several individuals who have been motivated by a desire to have control over the funds have seen invested heavily in it. These aspects have been seen as an important aspect more so after the global financial crisis. Some of the research firms have cited the need for cost saving investments and good performance investment as some of the forces behind drastic growth in the superannuation fund. It is also the main reason superannuation fund was established. The information from Roy Morgan research center shows that SMSF satisfaction among the investors is on the rise and the customer satisfaction has attracted many individuals to continue investing in the fund.
Another main driver of superannuation asset growth since the inquiry has been individual contribution to the fund something which has exceeded the investment own earnings. Like other countries, both the compulsory and voluntary superannuation contribution receives a fair tax treatment, and this has influenced the inflow of cash into the fund. For a contribution by APRA, the employer SG has mostly influenced regulated funds, individual’s contributions. While for SMSFs, voluntary contribution has driven the asset growth more so during the transition period up to the time when the simpler Superannuation system was introduced (APRA 2014)
The resulted effect of the contribution on the superannuation asset growth is partly offset by the benefit payments. Before the introduction of a simpler Superannuation system, there were several restrictions on the amount of benefits that could be paid by people at the concessional tax something, which hinders the growth of assets of the funds. in the year 2007, the Restrictions were removed, therefore, eliminating the tax that were payable on the retirement benefits from the tax source(Ashcroft 2009).
SMSF invest their funds in buying real estate property. Small amount of their assets are hold in the foreign assets and equities (Ashcroft 2009). Their direct owning of equities are negligible and their total risk exposure to the market asset is small compared to other superannuation funds. Some of their assets are also hold in debt security though in a smaller percentage reducing their risk hence we can conclude the SMSF is less riskier than other types of superannuation funds and investment (Ashcroft 2009). More recently, there are tentative signs that SMSFs are moving some of their assets out of cash and into higher-yielding assets.
A large share of the SMSF is held in property. Other investors in the market hold the direct property holding accounts for over 15% of the total SMSF assets and smaller percentage of indirect assets. Once the property is in the fund, the fund can lease the property to the business owner at a commercial rate and the rent paid by the business owner can be claimed as a business expense, reducing the taxable profit of the business. By contrast, SMSFs’ direct holdings of residential property are relatively small (23 per cent of their total direct property holdings).
Some of the potential risk is the liquidity risk that is facing financial sector with superannuation fund not an exceptional. How to manage cash flow from other investment has been a problem (ABS 2013).
Global financial crisis, which has heated all sector of the economy including superannuation sector with collapse of major financial crisis currency fluctuation in overseas investment is another potential risk which affect the company hence before investment into the fund, one need to consider(ABS 2013). Otherwise compared to other types of investment, it is more secure and less risky
The legislative factors and the growing number of individuals setting up the SMSFS as a vehicle to invest in property are the major contributing factors and the momentum that are geared to property investment through SMSFs. The conducive investment environment and increase in investors’ confidence, in the fund has led into the rapid growth of the fund. The growth is estimated to continue in the unforeseeable future with more relax rules and regulation in the sector.
Antolin P, S Schich (2011), ‘The Economic Impact of Protracted Low Interest Rates on Pension Funds and Insurance Companies’, OECD Journal: Financial Market Trends, Volume 2011 – Issue 1, pp 1–20.
Ashcroft J (2009), ‘Defined-Contribution (DC) Arrangements in Anglo-Saxon Countries’, OECD Working Papers on Finance, Insurance and Private Pensions, No 35.
ABS (Australian Bureau of Statistics) (2013), ‘Deaths, Australia, 2012’, ABS Cat No 3302.0, November
APRA (Australian Prudential Regulation Authority) (2014), Superannuation Trends, January Available at <http://www.apra.gov.au/Super/Publications/Documents/Superannuation-Trends-PDF.pdf>
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