Not many Australian’s would argue with the notion that we live in the best country in the world, while conceding that we take our environment and freedoms for granted. Our freedom to invest for retirement, largely as we would like through our own tax subsidised SMSF’s is one of those freedoms. This is very different from many countries where underfunded defined benefit schemes are the norm and governments appropriate retiree savings through mandating that pension funds provide minimum allocations to government bonds.
In the emerging ‘lower for longer’ investment environment, SMSF trustees should not take this freedom for granted. If we scratch the surface, it should be apparent that SMSF trustees have effectively entered a de facto contract with the government to generate investment returns on par, or better than, those achieved industry platforms. Failure to meet this bench mark, will bring claims of double dipping and increasing the future burden on the government pension system. It’s not too hard to guess what policy responses this could provoke from an unsympathetic government. The first few off the top of my head are:
- Reducing concessional allowances for contributions into SMSF’s;
- Reducing tax concessions for SMSF operating costs. On a proportionate basis SMSF’s can be much more expensive to operate than traditional funds;
- Requiring a minimum initial balance in setting up an SMSF;
- Mandating SMSF asset allocations along similar lines to industry funds.
It is hard to deny that:
- Many SMSF’s are too small to be really viable in a future ‘lower for longer’ return environment ;
- Many SMSF’s have operating costs disproportionate to their size;
- Many SMSF’s have idiosyncratic and under performing asset allocations, which fail to recognise the changing investment climate.
However, in a classic case of throwing the baby out with the bath water, such changes may also impact those SMSF’s which are actually delivering outstanding results.
In reality, a SMSF sector which, as a whole, outperforms the suggested benchmark, will actually reduce on government pension financing requirements and should encourage more, not less, government support. I would refer readers to the many posts on this site which provide strategies to help SMSF’s out-perform.
SMSF’s are a great and uniquely Australian initiative which provides trustees with the opportunity to rise above the pack and not ‘live like a pensioner’ in a low return environment.
We owe it to ourselves maximise our returns and ‘live like kings’. It’s also our civic duty.
In the mean time I intend to under-take some research to quantify the relative future tax impact of SMSF’s as a potential submission to the federal government. I will share this with you.