More Australians, including younger people and a growing number of self-employed and small business owners, are ignoring established pension – or superannuation funds – to set up their own personalised vehicles for retirement savings.
The momentum for Self-Managed Superannuation Funds (SMSFs), as they are known, has become such that the sector last year became the largest in Australia’s A$1.34tn (US$1.4tn, £908bn) retirement savings industry, accounting for 31.1 per cent of total assets.
One of the main reasons, according to Recep Peker, an analyst at research firm Investment Trends, is disillusionment with fund managers and financial advisers in the current market.
“SMSF investors will tell you they want more control, and they look at the prolonged flat or negative return from existing providers and think they can make better returns,” he says.
“There is a direct correlation between the popularity of SMSFs and the performance of the market.”
Investment Trends analyses around 3,000 SMSF investors each year in its annual survey, and the 2011 survey showed 28 per cent believe they can make better investments than their paid advisers, says Mr Peker.
They are also “fee averse” and are avoiding paying costs to financial planners, advisers and stockbrokers, preferring to invest directly themselves.
There are around 460,000 funds with 950,000 trustees, with an average 2011 balance of A$849,694. Over the past 10 years, an average of 2,500 new funds – which can comprise from one to four people – were formed each month.
For a long period, retail funds were the largest sector, but their share of total assets fell to 27.5 per cent by September 30 last year, according to figures released by the Australian Prudential Regulatory Authority.
The growth figures for the SMSF sector are quoted with enthusiasm by Andrea Slattery, chief executive of SMSF Professionals Association of Australia (SPAA), the industry body.
“Fifteen years ago SMSFs accounted for 15 per cent of all retirement savings, today that is 31 per cent,” says Ms Slattery, who founded SPAA in 2003.
“Everybody thought the SMSF sector was a cottage industry and no one was interested, and all of a sudden it took everyone by surprise because it was quite viable, and now it is certainly here to stay.
“It is the best performed sector of superannuation, it has the lowest costs, and it is the only one which meets the government objectives of longevity and sustainability, because once people retire they often cash in their industry fund, while they will keep using their SMSF.”
Ms Slattery refers to figures from last year’s Cooper Review of Australian superannuation, which show that at an average cost of 0.67 per cent per annum, fees for SMSF are less than those for the average industry fund – which is 1.1 per cent – and 2.1 per cent for retail funds.
She acknowledges there is a one-off cost to establish an SMSF – declining to give an average cost – but says once established, SMSFs have the lowest fee structures.
Financial firms offer to set up SMSFs for around A$700.
Mr Peker says SMSFs carry fixed annual costs and tend to have higher average and median balances than other funds, so the fees come out as a smaller percentage of the balance. The higher the balance, the more cost effective an SMSF becomes, he adds.
In terms of performance, Ms Slattery says the SMSF sector has outperformed the rest of the market, or the “regulated sector”, by up to 6 percentage points over the past 10 years. “In only two of those years was the sector in the negative compared with the regulated sector, so I think the performance is quite strong,” she says.
Mr Peker says his firm’s research indicates that SMSF owners are “rosier and more optimistic” in self assessing performance than industry funds, which need to comply with reporting standards.
“SMSF investors will say ‘well I bought these shares for the long run, and I don’t worry about this dip in the market’ so they are more optimistic,” he says.
The strong momentum of the SMSF sector was underlined at SPAA’s February conference in Sydney, where SPAA and Russell Investments presented an inaugural study of the sector.
This showed the number of funds with balances of less than A$150,000 had grown from 8.2 per cent of the sector to 20.4 per cent, a phenomenon attributed to the growing number of younger people going the SMSF route.
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