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Gen Y and the case for an SMSF

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Brendan Wheeler is a trauma sales support representative, and although just 26, is planning on starting up a self-managed superannuation fund when he has sufficient funds, some time in his early to mid thirties.

“It’s a great way to control your future…being able to direct your funds into specific asset classes,” he says.

He also has a very healthy attitude towards superannuation in general.

“And not that I’m necessarily retiring tomorrow but if I can do things today that are going to help that process later on, and set up [good] systems and habits today, that is going to make it a hell of a lot easier when it comes to that time.”

So despite the stereotypes around Generation Y that suggest they are all after instant gratification, some obviously have their eye on the future as well.

The 2012 SMSF Professionals’ Association of Australia (SPAA) study of the sector found that recently more Gen Ys and Gen Xs are looking at DIY super.

“In recent years, the SMSF vehicle has begun to attract a younger demographic. Some 13.7% of Generation X respondents (aged 31-45 years) and 10.0% of Generation Y respondents, intend to establish an SMSF within the next two years, compared to 10.5% of Baby Boomers,” that survey found.

So are there benefits to setting up an SMSF if you’re under 40 or even 30?

Pros

Let’s start with an analysis of the benefits of an SMSF for anybody. These include more control over your superannuation, flexibility to invest in a greater range of investments and reduced cost. The third one, reduced cost, is understood to apply on sizeable superannuation balances i.e. a balance of a size that many under 30 may not have accumulated. However the first two apply to people of any age.

“I think it consolidates all your super earlier,” Graeme Colley, director technical and professional standards, SMSF Professionals’ Association of Australia, says of starting up an SMSF under 30.

“I think they see that they are able to control those investments,” he says.

SMSFs are also attractive to young business owners.

“Many of them [the younger SMSF trustees] may be small business people who, from what we understand, are getting into investments that relate to their business,” Colley says.

Louise Biti, director and founder of Strategy Steps, says that it engages people early on with their retirement savings, which can only be a good thing.

“I think the benefit for younger people is it starts getting them more interested in super from a younger age,” she says.

Another benefit is the ability to tailor insurance. A mainstream fund is legally obliged to include insurance of some sort, and from late last year SMSFs are also now required to at least consider insurance as part of their investment strategy. However the policies offered may not give you maximum coverage. With an SMSF you can tailor the insurance, within some parameters, to get better coverage. Although premiums will be at market rates, you will get a tax deduction for them.

“If you’ve got your own SMSF you’ve got much more flexibility to shop around and find the policy that’s best for you,” Biti says.

And if you’re a couple under 30, you may well find that by consolidating your superannuation, you could come up with a balance that’s not far off the magic number for a cost-effective SMSF – $200,000.

Cons

The obvious con is the cost if you have a small balance. Many SMSF establishment fees and some ongoing fees are flat, which means the less you have the more expensive it will be.

However Biti points out that due to technological advancements, fees may not be as expensive as they once were. “There has been a lot of developments in different platforms … so I don’t know that [cost] is such a big issue anymore,” she says.

Even so, the start-up plus ongoing costs on a $25,000 superannuation balance will be quite sizeable.

Colley says it should take around six to eight years for someone to build up a decent sized balance, contributing up to their maximum contribution limits.

Mortgage versus superannuation

There are mixed views around whether it is better to pay off a mortgage or focus on your superannuation i.e. an SMSF. Colley cites research by Griffith University academic and superannuation specialist, Professor Michael Drew, that shows it’s much better to focus on building up your superannuation earlier, to insulate yourself from volatility.

“If you haven’t got a mortgage I think the option of paying rent and saving in super can be a very effective one, particularly because of all the benefits in super and then in retirement, you can chose to buy something,” Biti says.

Many young people, put off by the cost and the choice of being tied down to one location, may in fact chose not to buy a home. They may chose to buy property to invest, rather than live in, and even use their SMSF to do that.

Gen Y Brendan Wheeler says buying a property in an SMSF is something he would consider, but only after getting some good advice.

“It would be potentially something I would look at,” he says.

“I would have to assess it at that point, if the maths add up and it works out to be a good investment.”

Conclusion

If you are in the middle of paying down a sizeable mortgage, you may want to focus on paying that off first.

But if you’re under 35 and have a decent sized superannuation balance – which doesn’t necessarily have to be more than $200,000 – or at least the prospect of adding substantially to your superannuation in the near future, an interest in superannuation and the preference for controlling your own investments, then by all means an SMSF may be for you.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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