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The amount of money you should have in super to make it worthwhile setting up your own self-managed super fund (SMSF) is a contentious issue.
Over the years there has been much discussion and analysis by the Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC) and the Productivity Commission, but no clear answers. Just a general consensus that having at least $500,000 in super is a good yardstick, although starting with less may be justified in certain circumstances.
That consensus was reinforced by a comprehensive survey of more than 100,000 SMSFs by Rice Warner for the SMSF Association. But its report – Cost of operating SMSFs 2020 – went further, comparing SMSFs of different sizes and complexity with retail and super funds on a like-for-like basis, with some surprising results.
In this article, we’ll provide you with the latest statistics and perspectives on this vexed issue to help you make your own informed decision.
A cost-benefit analysis
One of the issues that skewed previous attempts to quantify costs was that there was no breakdown of one-off set-up costs and ongoing expenses associated with operating your own SMSF. This meant that set-up costs incurred in one year only skewed the average for all funds. There is also a wide range of investment fees and other costs that reflect the range and complexity of SMSFs themselves.
That said, it’s obviously important that the benefits outweigh these costs by as much as possible. Otherwise, you may be better off in a public fund with lower costs on your time as well as your finances. But when doing your own cost-benefit analysis, it’s important to compare like with like.
Set-up costs include professional legal and accounting advice to establish the SMSF’s trust structure and trust deed.
Ongoing costs for services and reports required by regulation include:
- The preparation of financial statements
- The preparation and submission of a tax return to the ATO
- The payment of a compulsory annual SMSF supervisory levy to the ATO
- A corporate trustee fee (if applicable)
- An annual audit of all financial records. This must be conducted by an ASIC-approved auditor to ensure that all fund activities are fully compliant with super legislation.
An SMSF may also need to pay actuarial costs to determine eligible member pension payments.
While these ongoing costs can’t be avoided, trustees can reduce their costs by handling some of the fund’s administration themselves.
Then there are optional costs, such as fees for professional investment advice or management services (if fund trustees choose to hire them).
And it doesn’t end there. There are also costs associated with winding up an SMSF. The amount will depend on the complexity of your SMSF’s financial arrangements and the wind-up process.
How do SMSF costs compare?
Once you have a clearer picture of what an SMSF is likely to cost someone with your level of assets and willingness, or not, to carry out some of the administration, you can more accurately compare it with other types of funds on a like-for-like basis.
To do this, Rice Warner examined the costs for the set-up and running of SMSFs with different balances, whether trustees outsource only their compliance administration or all their administration, and whether funds use low, medium, or high fee services.
The table below shows the range of costs for SMSFs of various size balances with shaded areas indicating whether the fees are above, within or below the range for retail and industry super funds with similar balances.
Note: The fees are fund-level costs so will be the same regardless of whether the SMSF has one or more members.
Comparison of annual costs of SMSFs (accumulation accounts)
SMSF fee above range for retail and industry funds
SMSF fee within range for retail and industry funds
SMSF fee below range for retail and industry funds
Source: Rice Warner: Cost of Operating SMSFs 2020
As you can see from the table, SMSFs with balances of $500,000 or more are generally cheaper than retail or industry funds. Previous research by Rice Warner back in 2013 had merely indicated that costs for funds of this size were competitive, but only cheaper than the alternatives if trustees do some or all the administration.
What’s more, funds with balances of $200,000 or more provide equal value to retail or industry funds at all levels of administration.
Rice Warner also found that comparisons for SMSFs in accumulation and pension phase were similar, as were those with a single member or two members. It also found that SMSFs with multiple members and a combination of accumulation and pension accounts are competitive with balances as low as $100,000 and may even be the cheapest from balances of $150,000 provided trustees do some or all the administration.
As expected, SMSFs with balances below $100,000 were generally more expensive than retail or industry funds. In 2019, 8.5% of SMSFs held less than $100,000 in assets, well below the figure of 11% in 2013 when Rice Warner last carried out its analysis. SMSFs of this size would only be appropriate if they expected to grow to a competitive size within a reasonable time. Indeed, there is evidence that the majority of SMSFs with low balances either grow relatively quickly or are late in the drawdown phase and preparing to close.
Of the 1,811 funds with balances of $50,000 or less at the beginning of 2017, 40% had grown above this range by the end of 2019, 27% were closed during the period and 33% remained within the range.
The high cost of direct property
One of the benefits and attractions of SMSFs is that they are the only type of super fund that allows members to invest in direct property. But this comes at a significant cost.
Rice Warner also did an analysis of total fees incurred by SMSFs with and without direct property investments. While median fees for SMSFs without direct property are competitive for balances of $200,000 or more, median and high fees for those with direct property are higher than the highest fees for retail and industry funds of all balance sizes.
Taking the example of SMSFs with a balance of $500,000 in 2019, median fees for funds without direct property were $3,207 compared with $9,969 for funds with direct property. Funds with the same balance but high fees had total fees of $15,908 without direct property and $29,799 with direct property.
This pattern of total fees was repeated for funds of all balances. The report attributed this to the higher investment costs of servicing direct property compared with other investments, and higher administration costs for accounting and related services.
This highlights the importance of doing your own cost-benefit analysis when considering an SMSF. For some SMSFs, investing in direct property may not stack up financially against other types of investments. For others, especially those with business property, the benefits of holding property in super may be worth the cost, especially when compared with the cost of holding property outside super.
SMSF costs are proportionally higher for funds with lower balances and less competitive with other types of super funds. These costs include establishment, ongoing and wind-up expenses, but also non-financial costs such as time you spend operating your fund. So, if you are considering setting up an SMSF, it’s important for the benefits to outweigh the costs or you may be better off with an industry or retail fund.
The information contained in this article is general in nature. It’s best to seek independent professional advice to determine whether setting up an SMSF is appropriate for your individual financial needs and circumstances.