One of the most commonly quoted “facts” that you’ll see when you’re looking at setting up a self-managed superannuation fund (SMSF) is that you need to have around $200,000 to make it worthwhile.
Is this fact or is it a myth? Let’s have a look.
The main reason $200,000 is often quoted as a minimum requirement is based on the general view of the average fees that many trustees will pay for the ongoing administration of the fund, and how this compares as a percentage to many retail or industry super funds.
It is often quoted that the average fee a SMSF pays for annual admin and audit is around the $2,000 to $2,500 mark. This is probably about right when it comes to using a personal accountant, and assuming you don’t have an excessive level of transactions.
So if you divide $2,000 into $200,000, you get 1% pa.
Now what if you also use a financial adviser for investment and strategy advice, and say that’s another $2,000 pa (or 1%pa). Then you are up to $4,000 pa altogether and its 2% pa.
So what do we compare this to? I’m looking at a very well-known retail super fund PDS right now, and the fee for the Balanced option is 1.88% pa. A typical industry fund will be cheaper than this at 1% or under.
So on the surface of it, the $200,000 minimum is looking about right (even a bit low in fact).
Hang on a minute…….
But here’s the thing. There are two big factors that can make a huge difference to this equation:
- There is an enormous variation in fees for annual admin and audit services. For example, there are “online” annual admin and audit services priced at $1,000 pa or under. In this scenario, if you only had $75,000, then the ongoing fees are around 1.3%. That is far from excessive.
- Not everyone wants to use an adviser. There is a reason why they are called “DIY” funds. In fact, the stats around this suggest only around 2 out of 5 trustees use a financial adviser for their SMSF. So including these fees into the equation for an average SMSF is probably not that indicative of the average at all.
The Bottom Line
Quoting an across the board minimum for a SMSF is misleading given the large variations that are involved, so this myth is busted.
For trustees who want to use a full service personal accountant and adviser, then the higher minimum balance of say $200K is appropriate given the higher ongoing fees applicable – which is totally fine.
However if your strategic situation is straightforward, you are doing your own investing, and you are using a low cost annual admin/audit provider, then a much lower minimum account balance like our $75,000 example above can be quite easily justified. Do the sums and if your annual expenses come in under 2%pa of the value of your fund (hopefully closer to 1% or under), then you are in the ballpark.
NOTE: be sensible about this. Setting up a SMSF with small amounts like only $20,000 or $30,000 is never cost effective, and should be discouraged. Plus it will get you firmly on the radar of the ATO as they will consider you at high risk of non-compliance. That is not our opinion – it comes from the very top of the ATO themselves.
This article was written by the SMSF Review on 17th September 2012.