Self-managed super funds: Why more and more Australians are managing their own

Interest in self-managed super funds (SMSFs) has skyrocketed among Australians in recent years. The Australian Taxation Office reports that as of June 30, 2014, nearly 1 million people were members of SMSFs, compared to 758,652 in June 2009, an increase of more than 200,000 in merely four years. In fact, over just the past 12 months, the number of funds and their combined worth have increased 6 percent.

There is a variety of reasons behind this rise in popularity. First, SMSFs give fund holders the opportunity to pay lower fees when compared to traditional superannuation funds. The low maintenance cost and the flat fee structure appeals to many investors, particularly those who have assets valued at $200,000 or more. SMSFs also allow small business owners to purchase commercial property from which the businesses can operate.

However, Brice Doherty, the head of UBS Asset Management Australia, notes that most people opt for SMSF over other superannuation funds because they allow greater control and choice over how the super is invested.

Indeed, many Australians have lost confidence in publicly available super funds and SMSFs allow a greater deal of flexibility when it comes to investment options. One of the most popular investment choices is direct property. In fact, many younger borrowers use their SMSFs as leverage to purchase commercial or residential property as part of their investment strategy. As many as 38 percent of borrowers ages 18 to 44 invest in property, according to a recent Financial Services (FSC) and UBS report. Additionally, SMSF holders can use their fund balance to complete renovations on any property owned by the fund, allowing them to save money on commercial rent.

This finding has led to concerns about whether or not SMSF borrowing is a threat to Australia’s financial system. Critics like Financial System Inquiry chairman David Murry have suggested all-out bans on limited borrowing recourses, to ensure that fund holders use SMSFs for their intended purpose: saving for retirement.

However, Doherty said there is no cause for alarm.

“In general, most Australians are responsible and are using [their SMSF] as income replacement,” he said.

Sally Loane, FSC chief executive, agreed that most people establish SMFs in order to save for a comfortable retirement.

“There’s no evidence that it’s being used for any other focus,” she said.

In fact, while the 18 to 44 age group of SMSF investors may use their funds to leverage for property investments, the group only makes up 15 percent of the SMSF marketplace. In comparison, older investors between the ages 55 and 64 make up the largest demographic of SMSF holders at 30 percent of the market, and have an average leverage level of just 16 percent. SMSF holders ages 45 to 54 also outnumber the younger demographic, as does the retirement age group of 65 and older. These numbers support Doherty’s assessment that limited recourse borrowing is not prevalent among older SMSF holders.

“In general … It’s the younger cohort that have a lot longer time horizon who are leveraging in their SMSF,” he said.

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