"I am in my mid 40's and I'm thinking of starting a Self-managed super fund. How much do I need in my Super to start this process? Is there lots of upfront costs?"
-From Danny in Perth.
Top answer provided by:
John Forwood
Hi Danny, this is a great question and one that has a number of different components to it.
The government and some industry associations have made specific dollar recommendations for minimum balance over the years. I will come back to these later.
The first question I would ask anyone looking at Self-Managed Super Funds would be why?
Common reasons include “the ability to control my investments”, keeping prices down” and “buying assets that aren’t normally available in public offer superannuation funds”.
Dealing with these in reverse order:
Assets that aren’t available in public offer funds:
This is a valid reason to consider a self-managed superannuation fund. However, you really need to consider what the returns on this investment are going to be? Will it grow in value? What income will the investment produce?
An asset that is only a growth asset (ie. Gold, crypto, etc) puts a fund in danger of not being able to meet the funds ongoing expense commitments and instead relies solely on member contributions to pay the bills. This may work for a time, but the risk is if you are unable to contribute such as the loss of your job the fund may be forced to sell the investment.
One of the key parts of deciding if an SMSF is right for your goals is to do a cash flow projection. Then stress test it, by removing contributions and removing income such as rent.
Keeping Prices Down
A common misconception is that SMSF’s are cheaper to run. The costs for an SMSF are different to those in a public offer fund.
In a public offer superannuation fund, most costs are percentage-based. Some funds do have a small dollar-based fee or a minimum fee, however, the majority of the fees are percentage-based.
Alternatively, the ongoing costs of running a self-managed fund are all dollar-based.
What does this mean for you?
A 0.3% administration fee on $500,000 is $1,500 a year. This fee would cover almost all of the industry/profit for members funds, and many of the retail and “Investor Directed Portfolio Service” funds.
Alternatively, to run an SMSF, most people choose to have an accountant do the annual tax return and statement of accounts, and everyone needs to have an annual audit done by an auditor. These fees range widely in the marketplace, and also differ based on the complexity of the work needed to be done.
In my experience, you can have an SMSF administration provider do the Tax, Accounts and Audit for as cheap as $1,000 for vanilla listed shares and managed funds. Or if you prefer your local accountant to do it, the fee is closer to $4,000 per annum. If you have direct property or other alternative assets, your fees may be higher.
Setup Costs
The other fee that needs to be considered is the setup of the SMSF. This fee will differ based on how you want to do the setup. Like most things, you get what you pay for.
A self-managed superannuation fund is a particular type of trust. As a result, it needs a trust deed, trustees and members.
A trust deed is a legal document, and therefore as part of the setup process, you need to pay for this document to be produced. You need to know that you will be a trustee (or a director of a trustee company), and what your responsibilities are under the Superannuation Industry (Supervision) Act 1993. You will need to sign a document acknowledging that you understand your responsibilities. This is a requirement of the ATO.
If you are not sure what you want in your SMSF or how to set it up, you will also need financial advice. A decent financial adviser will need to look not only at the prospective cash flow of the superannuation fund but also your personal cash flow to ensure that all of the fund’s obligations are met. The adviser needs to do this as once they have provided advice on the fund the adviser can be held liable if the advice is followed and the fund fails.
So, what are the setup costs?
If you want to do it on your own, and are happy with a relatively limited trust deed in terms of what you can and can’t do with your fund, then there are providers who will do this for free.
If you want a more personalised fund, that is set up for you by a financial adviser, then these fees will range from $3,000 through to $10,000 plus depending on the complexity, and particularly if you want to borrow in the fund.
The ability to control your assets
If this is the reason you want to set up an SMSF, then I would ask what assets do you want in your fund?
If it is real property (as opposed to property that is listed on the stock market), the figures don’t reflect this as a common asset. As of July 2021, only 15% of self-managed super fund assets were invested in real property. More than 60% of assets were invested in Cash, Shares and Managed Funds. For those who are interested less than 1% of SMSF assets in Australia are invested in collectibles or cryptocurrency.
Why do I raise the reality of these percentages?
If you are looking to control your investments, but only really want to invest in listed assets (available on a share market) or managed funds then there are plenty of superannuation funds that will give you this control, without the risk of being your superannuation funds trustee.
Some “investor directed portfolio service” super funds will allow you to invest in international shares. So if you want to own Apple or Alphabet (Google), then you can. The fees are low, and the ease of use is high, and you don’t need to sit down with your accountant every year and sign multiple meeting minutes that you have limited knowledge of why you are doing it.
The recommended minimum
In October of 2019, ASIC stated that “on average, SMSFs with balances below $500,000 have lower returns after expenses and tax, and will often be uncompetitive, compared to APRA-regulated funds”
Prior to that ASIC’s view was that the recommended minimum was $200,000.
Danny, hopefully, you can see from the above, that it is not just the balance that matters, but it is what you want to do with it that will determine whether an SMSF is the right superannuation vehicle for you.
John Forwood and Forwood Planning Pty Ltd ATF Forwood Planning Trust are Authorised Representatives (No. 1007813/1238510) of Australian Wealth Holdings Pty Ltd (AFSL 481674) ABN 72 608 528 427
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