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Your choice of superannuation

Air Commodore Robert Brown

31st July, 2018

Central to the design of the new military superannuation arrangement that commenced on 1st July 2016 is the concept of member choice. That is, from that date, any new ADF member has the choice of ADF Super (a military superannuation fund run by the Commonwealth Superannuation Corporation); or any other superannuation fund available to the general public, including an industry superannuation fund, a so-called ‘retail’ superannuation fund run by a financial institution or a self-managed superannuation fund (SMSF).

In alignment with many years of private sector experience of superannuation choice, the vast majority of our new members join ADF Super, mainly by default because they fail to make a choice within the statutory period of 28 days. This indicates an understandable lack of serious interest in superannuation by younger people for whom the amounts are relatively small and access to the money at retirement seems a long way off.

However, we can predict from observation over the years that as the balance in their ADF Super account grows, so will their level of interest in it. After all, with a Defence contribution of 16.4% p.a of salary, a member’s balance will quickly increase. As a result, some members will become so engaged that they will consider moving their money into another superannuation fund from which they believe they will receive better results. That is a matter of personal choice which an ADF member may exercise at any time.

One of those choices is a self-managed superannuation fund (SMSF). If you have one, you’re in good company. There are over 600,000 SMSFs in Australia, constituting over 99.7% of all superannuation fund entities. And bear in mind, contrary to popular myth, the 16.4% contribution by Defence stays at that level, no matter what type of superannuation fund is chosen. It doesn’t drop to 9.5% just because a person moves out of ADF Super.

So why wouldn’t you choose an SMSF in which to accumulate your retirement savings? Actually, the decision is not as simple as it might appear to be. That’s because an SMSF requires time and effort by you, not to mention expertise. Many people who start them live to regret their decision as the level of paperwork, compliance requirements, professional fees and investment decision-making grow. In addition, many people come to appreciate that their principal motivation for establishing an SMSF, namely control, is an illusion because much of the money ends up, directly or indirectly, in the hands of the very financial institutions that the owner of the fund is seeking to avoid.

Lately, we’ve seen enthusiastic promotion of SMSFs by spruikers for purposes of real estate investing. The reality is that most people won’t have enough money in their ADF Super account in order to buy real estate outright. Therefore, the promoters seek to arrange for the SMSF to borrow money (aka gearing) to finance the purchase, using the balance in the fund as a deposit. So far, so good. However, the problem is that real estate can go down in value, as we have seen around Australia in recent months; and that borrowing large amounts of money is inherently risky, especially in circumstances where the market is flat or even dropping and interest rates are at an all time low. The traditional lenders know this, which is why we’ve seen some of them announcing that they will no longer lend to SMSFs for purposes of buying real estate.

Then there’s the issue of diversification and safety of retirement savings. Whilst the law doesn’t require an SMSF to hold a diversified range of assets, arguably, there is an inherent and substantial risk in not doing so.

As with every decision, it’s important to look calmly and realistically at both sides of the argument. The numbers above certainly demonstrate that SMSFs are attractive to many people, but for many others whose lives are busy with career and family and/or who view their superannuation as a simple, diversified and ungeared ‘safe haven’ for their retirement, it’s likely that an SMSF would not be suitable, at least in their current stage of life.

Perhaps, in making such an important decision about your choice of superannuation, you should consider seeking the advice of a licensed financial adviser, but in so doing, understand the conflicts of interest that motivate much of the industry. We’ve produced a film on that subject, “Financial Advisers, The Facts and the Fiction”. It’s available to view on our website and also on DVD upon request. Before you make a decision about establishing an SMSF (or any other financial decision), do yourself a favour and watch the film.

Air Commodore Robert Brown
Chair, ADF Financial Services Consumer Centre

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