SMSFs offer superior individual attention compared to large funds

There is one particular area in which self-managed super funds (SMSFs) really excel.

Unlike very large funds – be they for profit or industry funds – SMSFs can really concentrate on the very small number of individuals they cover.

With a maximum cap of just six individuals, there is virtually no chance that an SMSF can fail to track every dollar that is owed to every member, assuming it is being competently run.

The same obviously does not apply to massive funds with millions of members which because of their scale are forced to make compromises when it comes to the treatment of individuals.

Instead of individualised attention, the savings of the masses are sliced and diced according to the individuals risk profile and then invested into massive pooled funds with unit prices that are designed to change to allow for money entering and exiting the fund.

Mass approach is efficient but hardly personalised

This mass approach can lead to much lower administration costs and is highly efficient but also to a less individual approach when it comes to actual retirement.

It is at the point where an individual actually retires that SMSFs show their “killer application” in the form of some precise accounting when their individual fund switches from accumulation mode to decumulation.

The big change that happens at precisely this point is that the super fund moves from having tax paid at the rate of 15% of earnings to zero.

Inside the SMSF, this means that any money that has been put aside to pay for this tax can then be easily credited back into the retiring individual’s account, from which their mandated account-based pension payments are made.

Another fantastic benefit that SMSFs have is that they can wait until all members of the fund are retired and are on a zero-tax base before selling assets, saving a significant amount of tax in the process.

That can be a serious benefit if substantial capital gains have been made by the fund.

Inside the massive pooled accounts of a big superannuation fund, such individual attention is difficult to provide on both an administrative and practical level.

Big funds using various approaches

The issue has certainly been noticed by the big funds which are facing a much larger number of members entering retirement and the answers to this issue vary according to the particular fund.

Quite a few have made a virtue out of a necessity and have turned this amount of set aside but now unrequired tax payment into a form of “sign on” bonus should the member decide to keep their retirement investments with the same super fund.

If the member decides to take their money and move to a different super fund, the “bonus” is lost – effectively added back into the massive investment pools to make an admittedly microscopic change to the unit prices that apply.

In this way, the “bonus” is being used less as a required accounting change and more of a marketing tool to ensure more members stick with their existing fund.

Way of calculating bonuses differs

The way that the “bonus” is calculated varies between the different funds and some may not offer it at all, while others may only offer it when asked.

Often the length of time the member has been with the fund will change the amount of the bonus.

For most funds there is also a claw back provision which is normally for a year to discourage the obvious tactic of taking your bonus and later running away to another fund anyway.

Among the big funds, AustralianSuper paid out $13 million in “retirement boosters” in the 2023 financial year to 7700 eligible customers, while MLC has paid an average $2000 per member since it began offering its “pension bonus” in February 2022.

TelstraSuper paid $2.5 million to members in the 2023 financial year, with the bonus capped at $8000 per member, while Brighter Super’s “retirement reward” is capped at $9500.

Fees and performance are the big things to watch

Of course, super fund members should always remember that the big determinants of their fund’s performance in retirement will be the overall level of fees charged and the asset allocation they have chosen plus the skill of the investment function.

While asking about and checking the size of any retirement bonus being offered is obviously a good idea, making sure that overall fees are low and the fund’s long-term performance is good are arguably much more important than any bonus in the long term.

Those who have taken the at times more difficult SMSF path can also glory in the fact that their more personal administration efforts have at least ensured that every individual in the fund is treated fairly and that overall investment taxes can be effectively minimised.