Honey, I shrunk the super sector

In the near future we can expect funds under management at industry funds to overtake all others including SMSFs.

Generic pic of a row of piggy banks in a line.

So, Macquarie Bank believes the number of big super funds will be cut in half in the near future … no doubt the bank holds a similarly shrinking projection for the future of Self Managed Super Funds where even leading professionals in the area now believe it is set for decline in the years ahead.

A range of high profile negatives surround SMSFs — not least a looming ALP government which favours industry super funds.

Yes, the one million strong SMSF brigade are politically vocal, in fact, an SMSF Party has just been created by superannuation lawyer Grant Abbott but the SMSF constituency is tilted demographically. Indeed, most SMSFs are in pension mode and that means the glory days of this once-flourishing scene may age with its key cohort.

This dominant generation had the benefit of very generous contributions arrangements over the last two decades.

However, in recent years the Coalition have nipped and tucked at these arrangements.

If it wins the May election, the ALP plans to further reduce and ultimately scrap a range of concessions in superannuation.

No wonder the so called “establishment rate” of SMSFs hit a ten-year low in the last batch of ATO figures. In the near future we can expect funds under management at industry funds to overtake all others in superannuation and that includes SMSFs.

As actuary Michael Rice told this year’s SMSF Association national conference: “it’s a fairly small decline and the decline is more due to the growth of other sectors than the decline of interest in SMSFs.”

But it is a decline when SMSF numbers should be flourishing. The turn came just two years ago when the Turnbull government broke a long tradition where retirees in Australia did not pay tax. Turnbull and his Treasurer Scott Morrison brought in the $1.6m cap on super which means that $1.6m is the maximum amount a person can have in their super funding a tax free income.

Any earnings on amounts over $1.6m are taxed — they may be left inside the super system in what is known as accumulation mode and attract 15 per cent tax or they may be placed outside super on marginal tax rates.

It is widely expected the ALP will ultimately replace this tax scheme with another version of the same thing. Under ALP rules outlined some time ago, the most you can expect to make in income from your maximum of $1.5m in super without attracting tax is $75,000 a year. (yes, that $1.5m is correct — it is $100,000 less than the Coalition’s number of $1.6m)

In reality, the two schemes are close financially. If you assume that an SMSF operating under the current Coalition rule gets a return of 5.8 per cent a year from their maximum funding amount of $1.6m then that investor would make $92.800.

(The 5.8 per cent estimated annual return figure is based on the very long term average annual superannuation fund return).

So you are talking about $75,000 per annum being the tax free under the ALP and perhaps a figure closer to $90,000 being the cap under current Coalition rules.

The big difference is incentive: The ALP version penalises retired investors who try to make more income, the Coalition version incentivises the super fund member to make as much as possible from the $1.6m (remember the current tax is on this core funding amount not on how much you might make from it if you invested successfully).

When you combine the reductions created or planned by both parties on super — and the parallel plan for franked dividends it is not hard to see why the tempo of the SMSF sector is muted at present.