Joshua Williams (left), Meg Heffron, Peter Burgess and Jo Hurley (photo: Anthony Burns).

Members of SMSFs are significantly more likely than members of APRA-regulated funds to take advantage of tax-exempt income streams after turning 65, research has revealed.

The ‘2023 Annual Benchmark Report’ from SMSF administrative provider Class shows that roughly seven out of every eight SMSF members aged over 65 have set up tax-exempt retirement income streams, compared to only one in two members of APRA-regulated funds.

The findings highlight the urgency for APRA-regulated funds to develop effective responses to their Retirement Income Covenant obligations, so members of APRA-regulated funds aren’t unduly disadvantaged by a lack of access to professional advice or better information and guidance about how to maximise their superannuation benefits.

“This is big,” Class CEO Tim Steele said, presenting the data at Class Ignite in Sydney on Wednesday Morning.

“This is a significant point of difference in terms of engagement and outcomes ultimately for members of an APRA fund compared to a member of an SMSF.”

Accurium principal Melanie Dunn wrote in the Class report that “attaining age 65 is an important condition of release for becoming eligible to commence a tax-free retirement phase income stream in superannuation”.

“Where members remain in accumulation phase, those accounts are subject to a tax rate on earnings of 15 per cent and are not paying members a retirement income,” she said.

Steele posited that this difference came down to SMSF members being more engaged with their super, and more focused on achieving the best outcome.

Tim Steele

“The investment strategy imposed on trustees requires them to think of their member objective and cash flow requirements when they retire,” Steele said on Wednesday morning.

“Trustees, we believe, are more likely to seek professional advice from accountants or advisers to commence a pension.”

SuperGuardian chief operating officer Joshua Williams said the retirement-income phase statistic left him “scratching my head”.

“[I was] just trying to work out if the calculation was wrong or the number was wrong,” he said.

“It’s astronomical. Perhaps not surprising… but the stark reality from my perspective is that there are so many Australians out there that are not getting the advice they need.”

While the number of SMSF members aged 65 or older in retirement income phase was significantly better than APRA-regulated fund members, Williams said it still isn’t good enough and advice is needed to reduce the number still in accumulation phase even further.

“We’re at a point where the number of advisers has just plummeted, we’ve got about 15,000 advisers left,” Williams said. “The availability and accessibility of advice is just not there.”

Tip of the cap

Treasurer Jim Chalmers announced earlier this year a 30 per cent marginal tax rate for super fund account balances over $3 million, which has been a point of contention for some in the sector, like the SMSF Association.

The benchmarking report found 5 per cent of members of SMFS administered by Class had super balances over $3 million as of the end the completed financial year, with another 4.7 per cent in the $2 million to $3 million range.

Some 77.7 per cent of members with $3 million balances are aged over 65. Of that 77.7 per cent, 24.4 per cent held direct property investments.

However, Heffron managing director Meg Heffron pointed to the 70 per cent of SMSF trustees that had less than $1 million in assets who won’t feel the impact of the proposed tax concession change.

“I think it will have a lot of impact on the people affected who already have one, but I don’t think it really impacts establishment at all,” Heffron said.

“I don’t think very many people go into an SMSF assuming they and their spouse will have $3 million each.”

Part of the proposed tax change included taxing unrealised gains, which SMSF Association CEO Peter Burgess said is now the association’s advocacy focus priority.

“It’s very unlikely at this stage the government is going to change its mind on the $3 million threshold, but we still remain optimistic they will come to their senses and not tax unrealised gains,” Burgess said.

He added that by taxing unrealised gains the reform “goes well beyond what it was intended to achieve”, which was to curb tax concessions on superannuation.

“For us, that is the area we’re focusing our advocacy work on now,” Burgess said.

Duality of growth

There were 610,287 SMSFs in total at the end of FY23, a 4.2 per cent increase from the 585,696 at the end of FY22.

Driving more than three-quarters of new SMSF establishments were Generation X (52.7 per cent) and Millennial (23.7 per cent) members.

Last year, ASIC updated its regulatory guidance and abolished the previously recommended minimum threshold of $500,000 to start a fund.

Williams said the response to updated guidance is still making its way through the advice industry and hasn’t yet materially impacted SMSF take-up.

“There hasn’t been much in terms of response from advisers on it, but it does take away one of those roadblocks in advisers’ minds around when an SMSF might be suitable for a client,” Williams said.

Heffron noted a similar view, but said it was an important step from the regulator.

“It was a very important first step having ASIC walk back what I would describe almost as an anti-SMSF stance to an acknowledgement that it’s a valid option,” Heffron said.

“We’re not yet in the space where advisers would routinely think it’s an easy option to recommend.”

Noting the increase of SMSF trustees that have been disqualified from the ATO – which has increased from 251 last year to 765 this year  – Burgess said if the sector wants to continue grow it has to be with people who are setting up funds for the right reasons.

“The ATO is disqualifying a lot more trustees than they were,” Burgess said.

“We have to pay attention to that because if we don’t get this right there’s always the risk that the regulations will step in and impose new barriers on people setting up self-managed super funds which will ultimately stop the growth of the sector.”

Burgess added an antidote to this will be financial advice and high-quality information being available.

“We would like to see more advisers stepping up to become specialists in this area…because we think that makes it easier for consumers to find high-quality self-managed super fund advice,” Burgess said.

On a more positive note, the Class report found the gender gap in the SMSF sector has narrowed, despite it becoming slightly wider in APRA-regulated funds.

In FY17 the average APRA super fund balance for men was 19.1 per cent larger the average woman’s balance. This has increased to 20.6 per cent in FY22.

However, for SMSFs the gap decreased from 17.8 per cent in FY17 to 15.5 per cent in FY21 (the latest ATO data available).

The average SMSF balance for a man was $930,047, while for women it was $789,601.

Class general manager for growth Jo Hurley said it was “exciting” to see the sector taking a lead on narrowing the gender gap.

“It’s great to see that SMSFs are closing the gender gap and really worrying to see the gender gap in APRA funds increasing year on year,” Hurley said.

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