This was an article written by Meg Heffron, a long term industry participant and a member of the Cooper Review panel, on 18 September 2014.
Prescribing minimum balances or setting tests for trustees will never be appropriate for SMSFs and the government should stay well away from that.
I started my SMSF 20 years ago with about $30,000 when I left my first job. It had four stocks, two of which immediately dropped in value. The remaining two stayed roughly the same during the next four years before I added to the capital when I left my second job. (By then, I’d learned my lesson – I got advice and have done so ever since).
So why did someone who knew nothing about SMSFs, had limited interest in investment markets and – most importantly – had such a small balance make the decision to start a self-managed fund?
While the common response today seems to be to take a cheap shot at accountants and blame them for all those funds with small balances, that was certainly not the case for me. I researched the options and made a conscious decision to start one despite the fact that it clearly wasn’t the cheapest or safest approach at the time.
What prompted me to start mine is probably similar to the drivers for many others with small balances. I started my working life at the beginning of the compulsory super regime. If the government was going to force me to save in superannuation, I was jolly well going to control it. While managing my own super wasn’t right at the top of my bucket list at the time, my attitude was “start as you mean to go on”. I figured I would make my mistakes early and ensure I was well equipped to make the best use out of my SMSF by the time it had a decent amount of money in it.
I also knew that moving into an SMSF down the track would be expensive. If I waited too long, there would be capital gains tax and potentially other costs to move my money when the time came. Or if I continued with my atrocious stock picking record I would have capital losses that I wouldn’t be able to take with me. Would those future benefits outweigh the costs of running my SMSF with such a small balance in the interim? Possibly not, but it was a risk I was willing to take.
And finally, I wasn’t really sure what support I was going to want long term. Would I want a financial adviser? If I changed my mind and moved advisers, would that mean a change in fund all over again? While I’d not really thought of the phrase “platform for life” back then, it’s what I knew I wanted.
Over time I discovered all sorts of add-on benefits to having an SMSF. When contribution splitting was first introduced, I was into it straight away. My husband will reach preservation age 10 years earlier than I will; it seemed like a no-brainer to start skewing our super to his account. Almost by chance I discovered that the fund to which I’d previously belonged wasn’t ready to offer it yet. I’d left a small balance there to keep my insurance but I was glad I had an alternative home for my contributions.
It took me years to creep above $100,000, at which point it finally became cost-effective.
So to all those critical of trustees with small balances and dubious about those who may have advised them, remember that a fund with a small balance is sometimes a transitory state. It’s also a very sane response to a legislative environment in which someone with $30,000 today will be forced to grow their superannuation for the next 40 years.
It’s why prescribing minimum balances or setting tests for trustees will never be appropriate for SMSFs and the government should stay well away from that.