Have you put SMSF in the too hard, too expensive basket? It might be worth another look.

So, you’ve been put off SMSF? True, there have been some horror stories in the past and as an investment strategy SMSFs are certainly not for everyone but we think it’s worth revisiting for a few reasons - the laws pertaining to financial planning advice are much tighter and more controlled now than ever, for many investors SMSF can provide excellent benefits compared to APRA regulated Superannuation Funds and new research shows that cost is likely to be less than you think.

Prior to the changes in government regulations for SMSF Advisors, accountants at Rowe Partners Accountants & Business Advisors helped many clients set up their own SMSF assisting with paperwork and fund administration to ensure they remained compliant with the ATO and looked after their retirement savings. Today, our Rowe Partners Financial Planning business takes on much of that work.

The key with SMSF and for any investment strategy for that matter, is to ensure you get comprehensive advice and consider the pros and cons before making a move. Rowe Partners can help you determine likely costs, assess your level of financial expertise as required to self-manage your investments and assess if you’ve got the time required to build and manage your portfolio so that it's profitable and will deliver on expectations. So, speaking with your accountant at Rowe Partners Accountants & Business Advisors is the perfect starting point. In the meantime, let's answer a couple of general queries you may have.

Why should I care what happens to my super?

If you’re a homeowner, besides your house, your super is likely the most valuable financial asset you own. If you’ve been in the workforce for some time but don’t own a property, it’s quite possibly the only significant asset you own. At some point in your life, you will need to rely on these savings to support you in retirement. It’s important to protect it! It’s also important to leverage it to improve your financial position over time so that when you need it, you have significant accumulated financial resources to draw on. This can be done in many ways such as shares, property, resources, managed employer superannuation funds, even investing in precious gems and metals but today we’re talking about SMSF.

Is SMSF risky?

Any investment strategy presents risk. The key is to be aware of the risks and manage for them. Today, SMSF is safer than ever due to increased scrutiny by regulators. We’ve always adopted a professional and ethical approach to SMSF advice but in the pre-regulation environment, it was not uncommon for investors to lose money at the hands of unscrupulous, unqualified operators encouraging people to use SMSF as a way (illegally) to access secured superannuation funds and invest in property they themselves had personal interest in. Values and returns were frequently overstated and, in some cases, properties never even existed. People were being duped out of valuable retirement savings and so it was necessary for the Government to step in and tighten things up.

Can I set up my own SMSF?

The short answer is yes. The better answer is unless you’re very financially astute, you probably shouldn’t. There are many legal requirements on SMSF Directors for the fund to be compliant and remain so. Failure to comply attracts significant penalties and not investing adequate time and effort to research, plan and implement your investment strategy could potentially lead to administrative oversights, poor investment choices and even lower returns. Let us help you get it right.

How much money do you need to start an SMSF?

This is a question that we are asked very often. New research has been released showing the true costs of running an SMSF. It has been shown to be less than first thought. For several years regulators maintained that the minimum amount needed to set up a viable SMSF is $200,000. Under the right circumstances, it’s possible to set up an SMSF quite early and with funds enough cover initial setup costs. The research highlights that SMSFs with a low complexity can begin to become cost-effective at $100,000.

The findings of the research 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). This helps significantly to guide decision making and in determining both the viability and likely performance of an SMSF. 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 $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.

Comparing 2 member funds

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. The below comparison can be used to grasp the ranges you might fall into.

Always remember, cost is not the only consideration.

When determining whether an 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 an 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.

How can we help?

If you would like to discuss whether an SMSF is right for you, please feel free to give Chad, Patrick or Robert a call on 1800 04 7693. Alternatively, you can refer to the SMSF Association’s trustee education platform, SMSF Connect.