One of the benefits of the holiday season is that we can take a longer view of how our retirement savings are going.
I’m talking about SMSF Trustees, pretty much, because the average pooled superannuation fund member doesn’t have enough of a sense of engagement to motivate them to do that.
From 2012 to 2015, I was Wealth Editor at The Australian, a job I joked was about watching other people get rich. I started out writing and editing articles designed for consumption by all retirement savers, but discovered fairly early on that they were almost exclusively being read by SMSF trustees.
Why? Because they have a lot more choice about where their money is being invested than do members of pooled funds, which have for the most part been specifically designed as a “set and forget” exercise. It’s hard to get exercised about your super during the accumulation phase if your only major focus is the total balance and it keeps climbing gradually. SMSF trustees are a great deal more engaged.
So, what are the big issues for SMSF trustees in 2018?
Property prices have to be top of the list for trustees who have investment property in the mix.
Well-located residential property is pretty well bulletproof as a long-term investment but there was a report in Monday’s AFR that class action law firm Morris Blackburn is getting a growing number of inquiries from small scale investors in mortgage stress.
And that’s happening when official interest rates are at record lows and property prices have merely been easing slightly from nosebleed levels. There’s not even a whiff of a bust at this point.
It sounds daft but it is also true that the banks have been lifting borrowing rates slightly for investors, plus there are a lot of interest-only loans that have converted to interest-plus principal. That usually happens after five years. I’d have thought that anyone who bought an investment property five years ago on borrowed money SHOULD be well ahead.
The villain of the piece here is most probably the property spruiking industry, which was disappointingly unhindered by the Future of Financial Advice legislation brought in, in 2013. That cracked down on commissions for advisers payable by financial products they recommend but unfortunately property is not classed as a financial product.
Which means it’s still possible to lure blue collar workers up to the Gold Coast with a “free” flight, stitch them up with a quite probably overpriced apartment and then back the newly acquired asset into a shiny new SMSF, using a chain of supposedly unrelated middlemen. It’s not a nice practice and it’s getting SMSFs a bad name.
Which may also help to explain why the amount of money being transferred into SMSFs from pooled super funds has actually fallen in the last two years, according to the Australian Prudential and Regulation Authority, APRA.
It notes that investment flows from pooled funds to self-managed schemes fell by 5% to $6.5 billion in the 12 months to September 2017.
But let’s not throw the baby out with the bathwater here: SMSFs remain the only way you can include a specific property in your superannuation, and if for instance you have used an SMSF to buy your business premises, you are a long way ahead of any pooled super fund outcome. SMSFs can make their own arrangements, whereas pooled funds simply can’t. It’s the nature of the beast.
The related issue is Interest Rates. They will probably rise in 2018, given that the market has priced in one 25 basis point rise during the year.
That’s not a lot even if, as I’ve said, a few highly leveraged savers have already started to sweat. The point to remember, particularly when you are heading for retirement, is that more people in Australia benefit from rising interest rates than fallings.
Anyone who has eliminated or even just significantly reduced their debt load, which is what should be happening as they approach the end of their working lives, will be better off in a climate of rising rates than falling.
Media reports often neglect this inconvenient reality because bad news sells better than good news, and there’s no more common Interest Rates story than someone who’s badly stretched financially and getting more stretched as rates rise. Call it Schadenfreude, the joy at someone else’s misfortune.
What the new mood on rates means is that savers should start looking again at fixed interest. There was a report last week that the average fixed interest offering in the US is now offering a slightly higher yield than the average equity dividend stream.
That said, as rates rise, bond prices correspondingly drop, and every galah in the bond market pet shop says the long running bull market in bonds is about to end. However there are deals to be done in commercial paper, which is higher risk but offers higher yields, and don’t forget the charms of Floating Rate Notes (FRNs) whose coupon goes up in line with interest rates.
We’re likely to see an easing of property prices before we see a lift in rates, and indeed the Reserve Bank will hold off lifting rates if it sees any major nervousness in our economy, particularly if unemployment starts to climb.
And the share market? There’s a tad more upside than downside but the lazy franked dividend trade that saw SMSF trustees load up on the big banks plus Telstra is less attractive than it was. It’s time for SMSFs to diversify a bit more widely in the equities space, even if it’s only in slightly less well known stocks with a good record of paying franked dividends.
Governments or every stripe are capable of doing silly things, most particularly putting their hand in the super jar, but I’d stick my neck out and say neither side of the House would be prepared to get rid of dividend franking. Without a great deal of advance warning, anyway.
If you liked this article you'll love the Switzer Report, our newsletter and website for trustees of self-managed super funds. Click here for a FREE trial and to hear more of Peter’s expert commentary and advice.