SMSFs are not for everyone, however for those individuals where a SMSF is entirely appropriate for them, the benefits can be considerable.
In the context of ongoing public debate regarding the appropriate minimum size for an SMSF, new research has provided insights into the true costs of running an SMSF. And the research shows SMSFs are cheaper to run than many people may think.
The findings allow SMSF trustees and potential SMSF trustees to compare appropriate estimates of fees for differing SMSF balances with institutional superannuation funds (commonly referred to as APRA regulated funds).
The costs include establishment, annual compliance costs, statutory fees and some investment management fees. Direct investment fees have been excluded.
What does the research tell us?
SMSFs with less than $100,000 are not competitive in comparison to APRA regulated funds (SMSFs of this size would generally only be appropriate if they were expected to grow to a competitive size within a reasonable time).
SMSFs with $100,000 to $150,000 are competitive with APRA regulated funds (SMSFs of this size can be competitive provided the Trustees use one of the cheaper service providers or undertake some of the administration themselves).
SMSFs with $200,000 to $500,000s are competitive with APRA regulated funds even for full administration. (SMSFs above $250,000 become a competitive alternative provided the Trustees undertake some of the administration, or, if seeking full administration, choose one of the cheaper services).
SMSFs with $500,000 or more are generally the cheapest alternative regardless of the administrative options taken. (For SMSFs with only accumulation accounts, the fees at all complexity levels are lower than the lowest fees of APRA regulated funds).
This research highlights that SMSFs with a low complexity can begin to become cost-effective at $100,000. This is a significant departure from what many had believed to be the case. For simple funds, $200,000 is a point where SMSFs can become cost competitive with APRA regulated funds or even cheaper if a low cost admin provider is used. With the proposed expansion to six member SMSFs, we may see many more take up this option at this threshold.
From a cost perspective, the real benefit of an SMSF is when it achieves scale in balance and this can occur when members pool their superannuation savings.
It’s more than cost
When determining whether a SMSF is right for you, your analysis must go further than just a simple comparison of the costs versus APRA Regulated Funds. It should also factor in your retirement and income goals and whether you have the desire, time and expertise to take on the role of a SMSF trustee. It’s also worth factoring in SMSF members may not receive the same level of protection in the event of theft or fraud that members in APRA regulated funds do.
James and Jenny are a couple in their late thirties. James has $50,000 in his APRA regulated superannuation account. Jenny has $150,000 in her APRA regulated account. They are considering a combined SMSF with a balance of $200,000.
Currently, James’ Retail superannuation fund is in the mid-tier of fees being charged ($572 a year) and Jenny is in an industry superannuation fund also in the mid-tier of fees being charged ($1,668 per year).
James and Jenny will be engaging an Accountant to undertake the compliance of their SMSF. They will collect and provide documents to their Accountant and therefore do not require an administration service. They will be engaging an Accountant (who charges mid-tier fees) because they have an on-going and strong relationship with them.
This should cost James and Jenny around $1700 per year, which compared to their current superannuation funds, represents a saving of around $540 per year.
James and Jenny also expect to make a significant non-concessional contribution in the coming years, and this will further improve the cost-effectiveness of their SMSF.
James and Jenny’s adviser is satisfied they understand the risks and the roles and responsibilities of being an SMSF trustee and have the time and desire to be an SMSF trustee.
James and Jenny’s adviser is also confident that their intended investment strategy is appropriate and viable, and they are likely to end up in a better position than remaining in separate funds. James and Jenny’s adviser is satisfied that setting up an SMSF is in their best interests.
James and Jenny also find the establishment of an SMSF with a balance of $200,000 could result in a significant CGT (Capital Gains Tax) cost saving by switching to an SMSF earlier in their careers. In fact, when individuals wait until their balances are much larger, establishing an SMSF at that point can result in much higher CGT rollover costs. This could be an issue for some individuals who delay starting an SMSF because it may not be cost-effective, at least initially, to start a SMSF.
It is also important to remember that cost and return are not the only factors to establish a SMSF. Control, investment choice, tax and estate planning and transparency are motivators too.
How can we help?
If you would like to discuss whether an SMSF is right for you, please feel free to contact our SMSF team.
*All information based on research completed by Rice Warner and provided by the SMSF Association.