New Vanguard/Rice Warner report takes an exclusive look at SMSFs in retirement

Vanguard | 17 February 2014


Vanguard and Rice Warner today released a research report into the financial needs and attitudes of Self Managed Superannuation Fund (SMSF) trustees in pension mode.

The real purpose of superannuation is to provide income in the retirement years. The growth of the SMSF sector points to more people - 986,441 trustees* - taking personal control of their retirement savings. Unlike the institutional super fund sector, about half of all assets in SMSFs are in pension phase.

The new report is based on a 47 question survey interviewing 320 retired SMSF trustees in October 2013 and provides an exclusive look at the sector including: risks and concerns of retired SMSF investors; investment choices and product awareness, and planning and expenditure in retirement. This report follows a 2012 report** prepared by Rice Warner for Vanguard and SPAA.

Commenting on the report, Robin Bowerman, Vanguard Principal and Head of Market Strategy and Communications said
"One of the significant findings of this report is that retired trustees are keeping a keen eye on investment risk, and you can see the corresponding choices being made in asset allocation".

"A concern however is that nearly half of the respondents don't have a written financial plan and only 37% have plans that contain details of a draw down strategy for their retirement income.

"Preparing a sound asset allocation plan and sticking to it over the long term can greatly assist investors to stay on track given the very human tendency to react to market noise".

Alun Stevens, Senior Consultant at Rice Warner, said,
"It is clear that retired SMSF trustees like what they are doing. They are happy with their performance and have a positive outlook for their retirement."

"Interestingly only one respondent nominated longevity as a concern and less than 25% were concerned about their income lasting for life. Larger account balances appear to contribute to the positive outlook".

"Despite concerns about investment risks, there has been a big move from cash to managed funds and direct equities since the last survey. Investors are clearly more comfortable with the markets and keen to grow their assets for the future".

Key Findings

Demographics and well-being

The report reveals that retired trustees of an SMSF appear to have higher educational qualifications than the general population. Average wealth was high with 76% having savings of $1m or more. 90% are comfortable with their current financial position and 85% expect to be comfortable over the next five years. 94% of respondents rate their physical and mental health as 'Excellent,' 'Very good' or 'Good', while only 6% rated their health as 'fair' or 'poor'. Respondents also rate their health as being better than the general population.

94% nominated their most significant concern was investment and associated risks. When asked about their level of concern, 70% indicated that they are very or somewhat concerned about a share market or economic decline. The majority of respondents (88%) are also concerned about the risk of possible changes to superannuation or taxation law.

Most respondents were not concerned about leaving any of their superannuation benefit as a bequest to their children. As we suspected the majority of respondents are home owners, with 96% owning their house outright, and they may regard the home and superannuation as being assets with different purposes.

Investment choice and product awareness
A key finding in this report was that retired SMSF asset allocations have, on average, a much lower allocation to residential and commercial properties than the ATO statistics show in general SMSFs.

The level of gearing of property is also much lower with only 0.7% of asset value being invested in geared property. Allocation to cash and term deposits sat at 21%. Allocations to managed funds and trusts (both listed and unlisted) were significantly higher than for the 2012 survey. This is likely due to the different methods used to recruit respondents. The respondents for this survey include a significant number of Vanguard clients who can be expected to be above average users of managed funds and trusts.

Approximately 30% of respondents either own or are planning to own Exchange Traded Funds (ETFs) with exposure to the Australian market with a similar percentage owning or planning to own ETFs with exposure to overseas markets.

There is still little interest in annuities with 80% of respondents aware but not interested in investing in them. Only 30% indicated that compulsory annuitisation would cause them to alter their plans. 96% of respondents own their own home outright with a further 3% still paying their mortgage off.

Retirement planning and expenditure
Only 54% of respondents have a written financial plan and only 69% of these contain plans for the draw down strategy to fund income in retirement. When asked what would be a sustainable draw down rate, 39% of respondents selected 4% per year, 49% selected 6% per year and the remaining 12% selected 8% per year.

The actual rates of draw down reported, in general, conform to this range, but interestingly some 10% of respondents have draw-down rates above what they regard as sustainable.

The most important sources of income reported were superannuation pensions and non superannuation investment income. This is unsurprising given the respondents are self-funded retirees.

Respondents reported changing expenditure patterns in retirement when compared to pre-retirement spending. Increases are reported for medical, transport and leisure expenses with reductions in clothing and personal care. The expectation is that medical expenses will increase over the next 10 years for most respondents.

* Australian Tax Office: Self-managed super fund statistical report - September 2013
** The 2012 Survey of Financial Needs and Concerns prepared by Rice Warner for SPAA and Vanguard was conducted with clients of SPAAs professional membership base whereas the survey referred to in this release was run with retired SMSF clients of Vanguard. Therefore the results of the two surveys are not directly comparable.

About Vanguard

With over A$3 trillion (US$2.7 trillion) in assets under management in the US and through subsidiaries worldwide as of 31 December 2013, including A$380 billion (US$340 billion) in ETFs, The Vanguard Group, Inc. is one of the world's largest global investment management companies. In Australia, Vanguard has been serving financial advisers, retail clients and institutional investors for more than 15 years.

About Rice Warner
Rice Warner is a leading research and consulting firm operating in the financial service industry. Rice Warner has been delivering market insight to clients for over 25 years and is respected for its thought leadership and independent advice.