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Setting Up Your SMSF – Costs to Consider

How much money do I need for an SMSF?

Self-managed super funds (SMSFs) are the fastest-growing sector of the superannuation market, and it's no wonder why, with so many benefits to be had.

They provide individuals with greater control over their finances, flexibility and investment options, but there are also responsibilities and costs to consider.

If you want to take charge of your superannuation and save for a more comfortable retirement, starting an SMSF may be the solution. However, before choosing the SMSF route, it's important to not only be aware of the time and effort need to manage your investments but also the costs involved when doing it yourself.

Let's take a closer look at how much it costs to run an SMSF and how much money you need to invest in making it a viable option for your retirement savings.

How Much Money Do You Need to Start an SMSF?

A popular question asked by prospective trustees is: How much money do you need to justify a DIY super fund as a cost-effective super option? The good news is that the financial services regulator, the Australian Securities and Investments Commission (ASIC), has commissioned research to uncover what the magic starting balance might be for a self-managed super fund (SMSF).

If all DIY super funds were run similarly and had identical costs, the ideal minimum balance for a cost-effective SMSF would be easy to identify. The magic figure for everyone considering an SMSF is then the fund balance that enables an SMSF to cost less than an alternative super fund, such as an industry super fund or retail super fund.

The more practical answer is that the minimum necessary to enable an SMSF to be financially viable depends on the individual costs of your SMSF, and those costs can then be compared to what you would be charged if you opted for a large super fund option rather than an SMSF. A low-fee large super fund charges, on average, roughly just over 1 per cent of your account balance in fees. If your SMSF costs are greater than 1 per cent of the value of your SMSF assets, or greater than the costs of the large-fund alternatives available to you, then your SMSF's fund balance may not be the most cost-effective balance.

Even with different cost levels across all SMSFs, ASIC has commissioned research, conducted by Rice Warner consultants, to discover what the minimum cost-effective fund balance is for an SMSF.

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At least $200,000 and up to $500,000

According to ASIC's SMSF research, if SMSF trustees undertake some of the fund administration responsibilities themselves, rather than appoint a service provider to do everything, then SMSFs with fund balances of $200,000 can be cost-competitive when compared to large funds, such as industry and retail super funds. The requirement is that the research deals with averages, so some SMSFs will be cheaper to run, and some will be more expensive, depending on fees charged and the service level required.

If you want a full administration service for your SMSF, then the minimum fund balance is likely to be $500,000 if you want your SMSF to be cheaper to run than other non-SMSF alternatives.

Balances of less than $150,000

SMSFs with fund balances of between $100,000 and $150,000 can be competitive against traditional retail, personal super funds, but not cost-effective when compared against industry funds and the new lower-fee retail super fund offerings.

If you expect to start an SMSF with less than $100,000 in superannuation savings, the ASIC research found that a $100,000 fund balance is only cost-effective if you plan to make large super contributions or transfer super amounts from other funds, within a reasonable timeframe.

How much do I need to have to make getting an SMSF worth it?

When it comes to the minimum viable SMSF balance, for many, it's more about the why and not the balance. Although, for my family SMSF it was $200,000, as I believed that until my wife and I had that much in the fund, the administration costs, as well as my additional time and effort, would not justify having a self-managed superannuation fund.

Thankfully in the last few years, it has become more a personal decision rather than a purely financial decision. The personal decision revolves around a desire for more transparency, to have more control or to adopt a hands-on approach to the management of retirement funds. Often it is a wish to combine a couple's funds together to achieve economies of scale or the flexibility to fund a property purchase in superannuation with or without borrowing.

What costs are involved for an SMSF?

In the government's 2009 Super System Review, they noted that SMSF members are on average older, earn more and have larger superannuation balances than the average worker, with the average SMSF member balance being $456,000. There is a good reason for that  on average, SMSFs with $200,000 or less had both higher proportional costs than would be charged in a public offer fund and did not perform as well as larger-sized SMSFs.

Here is why SMSF fees are no longer a major issue:

Fees for administration and auditing have plummeted with the availability of data feeds from bank accounts, share trading platforms and managed funds, combined in many cases with outsourced back-office administration to overseas. So if you want to manage all the investments yourself, here are the approximate costs you are looking at:

Once off SMSF Setup Fees

  • Trust Deed: $150-$500
  • SMSF Sole Purpose Trustee Company: $500 – $880

SMSF Annual Costs

  • Online Accounting Admin & Audit (Basic service with little or no tax, accounting or structure advice): $665 – $1660
  • Annual ASIC Corporate Fee: $45
  • ATO Supervisory Levy: $388 ($518 for new funds in 2014)
  • Add in five Share/ETF/Hybrids trades per year at an average $33
  • No charge for a bank account, term deposits or IPOs.

So you are looking at annual costs of $1,263 upwards. On the basis of the 1% fees rule of thumb that would mean someone with $126,300 would find it achievable to run an SMSF cost-effectively.

Remember these are the base fees, and once you add the requirement for tax or financial strategy or product advice, then you must be prepared to pay more either ongoing or as a fee for service.

The competitors to SMSFs talk about returns, asset allocations and fees and commissions and they completely miss the "sleep factor" that many people appreciate with an SMSF. People love transparency, security and control, even if for the most part the same attributes are marketed as available in "Member Directed" industry or retail funds. You see, after the GFC many people just do not seem to trust the big players anymore and the internet and technology mean they don't have to, either.

So in the context of the current market costs to service your SMSF, $125,000 may be the minimum required for a viable fund. Still, I will stick to my recommendation of $200,000 with regular annual contributions meaning that within 5 years, the fund should go well above $300,000. This justifies the administration costs and some decent advice and guidance to help make the most of the system.

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How do SMSFs work?

An SMSF is a private superannuation fund, designed to help you save for retirement, that you manage and control yourself. SMSFs can have a maximum of four members. The members of an SMSF are usually also its trustees, allowing them to run the fund for their own benefit. This means you're responsible for all decisions relating to the fund and for ensuring that you comply with all laws and tax requirements.

When you run your own SMSF, you need to be able to make investment decisions that align with your financial needs for retirement. This means you'll need the necessary financial knowledge and skills to make the right decisions, as well as manage a range of legal obligations.

But while an SMSF can be ideal if you want to take control of saving for your retirement, there are significant establishment and running costs to contend with. You must be fully aware of these costs before deciding whether an SMSF is right for you.

What costs are associated with running an SMSF?

There is a range of costs associated with setting up and running an SMSF. These costs can be broadly separated into three categories: establishment costs, operating costs and investment management costs.

Establishment costs

If you wish to run an SMSF, you will first need to establish the fund formally. This involves obtaining a trust deed, appointing a trustee and signing the trustee declaration. According to a 2013 report from Rice Warner, these setup costs can range from $345 up to $990.

However, if you choose the commonly recommended option of using a corporate trustee, where all members of the SMSF are directors of the corporate trustee, covering the resulting Australian Securities and Investment Commission (ASIC) and service provider fees can see establishment costs balloon out to anywhere between $916 and $2,035.

Operating costs

Just like any other super fund, there are costs associated with running an SMSF. These include the expenses associated with investing and taking care of auditing and accounting requirements for your SMSF. You need to remember that these costs will eat into your retirement savings.

Ongoing operating costs for your SMSF include:

  • An annual ASIC corporate fee
  • Annual ATO supervisory levy
  • Audit fees
  • Costs incurred to prepare financial statements and tax returns
  • Actuarial certificates if your SMSF is paying an income stream (pension)
  • Financial advice fees
  • Valuations of assets held by the SMSF
  • Legal fees, for example, if you need to make changes to the trust deed
  • Assistance with fund administration tasks
  • Insurance for SMSF members

Some of these fees can vary widely based on the complexity of your SMSF and the costs charged by third-party providers (accountants, law firms etc.) that you hire to help ensure you comply with all ATO obligations. You can also choose between full-service providers, which take care of all the fund administration for you or doing some of the administration yourself.

According to the Rice Warner report mentioned above, the annual operating costs of an SMSF in the accumulation phase can range from $1,163 to $2,367. However, if your SMSF provides a pension, this figure can rise as high as $2,957 per year, while if you opt for a full administration service costs can top the $8,000 mark.

Investment management costs

SMSFs also use managed funds for a small portion of their investments, so the third cost you need to contend with is investment management fees. These expenses vary depending on the size of your investment in managed funds. Still, for SMSFs with a balance of $500,000, the Rice Warner report calculated annual investment management costs of between $208 and $714.

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The benefits of investing with a larger SMSF balance

The fee comparison on amounts is one benefit of an SMSF.

The other reason you might consider an SMSF when your balance is in excess of $500,000 is the control you have. When a balance approaches this amount, we typically take more interest in our super, as we want to make sure it's invested the right way.

When your SMSF reaches larger amounts, we encourage our clients to take the time to develop a proper financial plan. This allows you to understand where your super is likely to grow and determine what sort of lifestyle you can expect when you reach retirement.

Taking a real interest in your SMSF enables you to have more control, and makes your money seem more tangible. However, with this increased involvement comes a cost that retail and industry super funds don't take into account: your time. Managing your SMSF takes time, especially in its early stages, so for a successful SMSF, you have to be prepared to put in the work.

There's more to starting an SMSF than having the right amount of money

It's important to understand that having a super balance in excess of $250,000 is not an automatic reason to start an SMSF.

Starting an SMSF isn't just about the money. It's also a matter of if it suits your personal financial situation.

When looking at starting your SMSF, you need to ask yourself:

  • Do I have an interest in doing this?
  • Do I have the financial literacy to be able to manage my SMSF?
  • Do I have access to the right advice to help me run it?
  • Are there other super options that may be better suited to my situation?

In some cases starting an SMSF may not be the best option. A retail or industry super fund may suit your objectives and situation better.

So if you're considering starting an SMSF, it pays to have a conversation with your financial adviser.

Possible downsides of SMSF setup

While there are many benefits of SMSF setup, it may not always be the best option for your individual circumstances. This means that you should only set up an SMSF if you are going to take an active interest in your super.

Having an SMSF comes with a variety of responsibilities; you are effectively owning and operating a super fund. As the trustee, you are responsible for running the fund correctly and staying compliant with the Australian Tax Office (ATO). Your responsibilities include:

Lodging annual tax returns

  • Being independently audited every three years
  • Having a documented investment strategy

You also need to consider how much money you have for your SMSF setup. In most cases, you will need at least $200,000 in your SMSF for it to be viable.

Finally, you should always get professional advice for your SMSF setup and maintenance. Professional advisers can help you shape your investment strategy and handle all of the compliance requirements for you.

Preparation and planning are essential if you want to get the most out of your SMSF setup. If don't have a clear answer for any of the above questions, then you need to get professional advice before you set up your SMSF.

If you have a clear answer for each of these questions, you still need to get professional advice to ensure your SMSF is compliant and your investment strategy is sound.

Minimum cost-effective balance for an SMSF

  • Less than $100,000: SMSFs are simply not a competitive option when compared with APRA-regulated funds.
  • $100,000 to $150,000: SMSF costs can be competitive with the cost of larger retail super funds provided that the trustees undertake some of the administration duties. However, industry funds and personal super options are a cheaper alternative.
  • More than $200,000: SMSFs can be competitive with retail and industry funds if the trustees are willing to take on some of the administration.
  • More than $250,000: SMSFs can be the cheapest option for balances of this size provided that the trustees undertake some of the administration.
  • More than $500,000: If you have a balance of above $500,000, the report found that SMSFs can be the cheapest alternative, even if you opt for full-service administration.

To sum up, the report found that you would need a balance of at least $200,000 to $250,000 if you're willing to do some of the administration yourself, while if you opt for full-service administration, this only becomes cost-effective when you have a balance of $500,000 or more.

Of course, operating costs can sometimes vary substantially from one SMSF to the next, so it's important that you fully understand all the potential expenses involved before deciding whether an SMSF is a right choice for you.

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