Last year, Self-Managed Super Funds (SMSFs) held a whopping $140 billion in cash and term deposits, accounting for 16.7% of their $480 billion total assets. In comparison, significant funds like Australian Super and Hostplus had significantly less in the same asset class, with 4.8% and 5%, respectively. Traditionally, significant funds criticised SMSFs for their high cash holdings, claiming it revealed a lack of investment expertise, but this argument is now losing ground.
The main reason for SMSFs’ emphasis on cash is liquidity. When SMSF trustees opt to pay themselves a pension for tax benefits, the minimum amount is based on their fund’s balance and their age. So, if you’re 75 with a $500,000 balance, you must pay yourself a minimum of $25,000 a year (5% of $500,000), which increases with age.
It’s worth noting that SMSFs have been reducing their cash holdings over the years. In 2014, cash and term deposits made up 27.4% of their assets, but now it’s much less, partly due to declining interest rates and growing investment savvy.
A study from the University of Adelaide’s International Centre for Financial Services found that SMSFs with a balance of $200,000 or more deliver comparable investment returns to APRA-regulated funds. They also effectively utilise franking credits and prefer investing in what they understand, like Australian blue-chip stocks.
In conclusion, the argument against SMSFs’ heavy cash holdings is losing ground. SMSFs are proving their investment insight, and in today’s unpredictable market, having some cash on hand is a prudent strategy. In the words of Leon Trotsky, it’s time to bury the notion that SMSFs are investment novices.
Analysis source: Australian Taxation Office
