SMSFs: Enough super to justify SMSF running costs?

For example, ASIC considers that financial advisers should consider whether an SMSF is a cost-effective option for a client. ASIC is proposing that financial advisers explain the following SMSF costs to clients:

• set-up costs
• ongoing costs
• wind-up costs
• cost-effective balance ( see later in this article)
• time needed to run an SMSF
• cost of insurance if purchased via an SMSF

The report, ‘Costs of operating SMSFs’ examines whether an SMSF is a cost-effective option, and the point at which an SMSF structure is likely to be cost-effective compared with a large super fund (such as an industry super fund or retail super fund). The report also provides some interesting data on SMSF set-up costs, running costs of an SMSF, and other specific costs.

Clearly, there can be no single ‘minimum’ amount because the cost-effectiveness of an SMSF depends on the level of costs, fund balance size and a comparison against other alternatives. The burning question is whether consultants Rice Warner discovered some magic minimum range when looking at fund balances.

How much money do you need to start an SMSF?

On the question of minimum cost-effective balance, the Rice Warner report found:

• Less than $100,000. SMSFs with fund balances of less than $100,000 were not cost-effective in comparison to a large super fund, unless the SMSF could grow within a reasonable time by making substantial super contributions, or by transferring other super balances into the SMSF.
• Between $100,000 and $200,000. SMSFs with fund balances between $100,000 and $200,000 can be competitive with the more expensive type of large super funds (typically retail personal superannuation funds funds), but only if the SMSF trustees undertake some of the administration and investment functions themselves. SMSFs in this range can still outsource transactional services and remain competitive.
• More than $200,000*. SMSFs with fund balances of $200,000 or more, are competitive with both cheaper and more expensive large funds, provided the SMSF trustees undertake some of the fund administration.
• More than $250,000*. SMSFs with fund balances of $250,000 or more are the cheapest alternative compared with all types of super funds, provided the SMSF trustee does some of the fund’s administration.
• More than $500,000*. If SMSF trustees require full service from SMSF administrators, then a fund balance of $500,000 is needed to be more cost-effective than a large super fund.
• Pension funds. The cost analysis is transferable to SMSF pension funds. A SMSF in pension phase is more expensive to run, but so is a pension account in a large super fund.

The findings in the ASIC-commissioned report are based on a range of costs, which can provide a useful reference for SMSF trustees when comparing the costs they pay for running an SMSF. In summary:

• Need $500,000 if opt for full service administration: According to the Rice Warner report, if you plan to appoint an SMSF administration company to provide a full service for your SMSF, then you are likely to need around $500,000 in super to make an SMSF a cost-effective option against other super fund alternatives, such as an industry super fund or a retail super fund.
• Need $200,000-$250,000 if do some administration yourself: If you plan to do some of the fund administration yourself, then you are likely to need between $200,000 and $250,000 in super to make an SMSF a cost-effective option when compared against the costs of large super funds.

How much does it cost to run an SMSF?

All SMSFs must incur certain costs each year due to compliance requirements, such as an annual ASIC fee of $48 (if you have a corporate trustee and the sole purpose of the special purpose company is to act as superannuation trustee), the ATO supervisory levy of $259, an audit fee and preparation of financial statements and preparation of your super fund’s tax return. Some SMSF trustees prepare their own financial statements/reports and tax returns but most rely on accountants or other service providers.

According to the Rice Warner report, these annual compliance costs (as at 2013) can range from around $1,200 a year, to $2,400 a year, and if trustees choose to outsource all administration costs (including investment administration) then annual costs (as at 2013) can range from $2,900 a year up to $7,450 a year.

If you’re running a pension within your SMSF then the costs (as at 2013) can range from around $1,600 up to $3,000, and if you opt for a full service provider then costs for a SMSF pension fund can range from $2,900 up to $8,000.

For more details on SMSF costs, see the full ASIC/Rice Warner report (we provide the link at the end of the article) and for updated cost schedules, see the SuperGuide articles listed at the end of this article.

How much do large super funds cost?

The Rice Warner report also examined the costs of large super funds (such as industry funds or retail funds) for different account balances. Since the report looked at cost comparisons with SMSFs, this article focuses on the $200,000 and $250,000 and $500,000 account balances, which are the cost-effective fund balances suggested by Rice Warner. The report noted the following:

• Balance of $200,000: An industry super fund account balance of $200,000 can cost (as at 2013) between $1,200 and $2,450, or if spread across 2 members, these super balances can cost from $1,250 and up to $2,500 each year. A retail master trust account balance of $200,000 can cost (as at 2013) between $1,050 and $3,950, or if spread across 2 members, these super balances can cost from $1,100 and up to $4,050 each year.
• Balance of $250,000: An industry super fund account balance of $250,000 can cost (as at 2013) between $1,500 and $3,000, or if spread across 2 members, these super balances can cost from $1,530 and up to $3,100 each year. A retail master trust account balance of $250,000 can cost (as at 2013) between $1,300 and $4,900, or if spread across 2 members, these super balances can cost from $1,350 and up to $5,000 each year.
• Balance of $500,000: An industry super fund account balance of $500,000 can cost (as at 2013) between $2,900 and $6,000, or if spread across 2 members, these super balances can cost from $3,000 and up to $6,060 each year.

Note: If you join a personal retail superannuation fund, rather than a retail master trust, then annual costs are higher than those quoted above, according to Rice Warner. For example, the fees on a $500,000 balance can cost up to $10,000 a year. New retail products have come onto the market however that have similar fees to industry funds.

Seeking more information…

For more information on this analysis of super fund costs see the ASIC/Rice Warner report

For more information on SMSF costs, see the following SuperGuide articles:

• SMSFs: How much does a DIY super fund cost?
• Guide to the ATO SMSF supervisory levy
• Are SMSF audits too expensive?
• SMSF confidential: the inside story on DIY super funds