SMSF Basics – What is the minimum amount for a self-managed super fund?
There are many views on what is the minimum amount for a self-managed super fund to have to make it worth the effort.
It will cost money, like the fees already paid in commercial retail and industry super funds! They have staff and running costs like any organisation.
Minimum amount $200,000 or less?
Overall, there is no right answer when it comes to the minimum amount with which you can start a fund, and $200,000 is often floated about because this is the point at which the cost of running an SMSF is comparable to the cost of having super in a retail fund such as those run by MLC, BT, Colonial or AMP. This equates to about 2% or $4000 per annum. Also, the Australian Securities and Investments Commission (ASIC) suggests $200,000 as a minimum, based on research from Rice Warner and their own assessment (see down the page there).
Note, in some situations it makes sense to start an SMSF with less, for example if the members want more control over their investments, or if the individual already has a high income and expects the SMSF balance will reach $200,000 in the near future. There are cases of people starting with smaller amounts and then quickly building their fund through contributions. There are now ways to build up an SMSF quite quickly. With SMSFs now able to borrow, such as to invest in residential property, people with account balances of $150,000 can now invest in a $450,000 property, depending on the lender’s criteria.
Lower costs by combining members with small balances
The typical SMSF has two members (70% of SMSF) and it is the combined value of their super that is important. The smaller the fund value, the larger the costs such as accounting, audit and annual lodgement fees will be as a percentage of the fund total. Some people start SMSFs with as little as $100,000.
But you can have up to 4 members start an SMSF together, and the same cost is shared over the FULL SMSF, not individual members – and thanks to economies of scale, what it costs someone to run an SMSF through an outsourced administrator has dropped.
With SuperBenefit the costs are negotiable, as we want to work with you and your advisors to succeed, not line our pockets!
However considering minimum accounting and audit costs, it is generally considered to be uneconomic to start with a balance lower than say $50,000. The average cost to run a fund is an Average $2500 a year (we can do less), the fund would need to earn 5 per cent a year just to cover costs. The average balance of NEW SMSFs is just over $200,000, and now that the cost of running SMSFs has come down, it may make economic sense to start SMSFs with smaller balances.
Age to start an SMSF
We are also seeing more young people open SMSFs, because they are empowered by information from the internet and their own investment knowledge. Younger people are also more driven by peer pressure from their friends, so they are emotionally compelled to start their own fund. They also have a sense of invincibility and believe retirement is a long way off, so time is on their side, and people in their 30s and 40s tend to start with lower balances in the knowledge they will build up their SMSF.
What about starting an SMSF with a small amount near retirement – it may or may not make sense, because the cost of running the fund will become more expensive, as a proportion of the balance, once the member starts drawing down on their fund. In addition, people over the age of 65 can earn up to around $26,000 tax free (2 x $18,000 as the tax-free threshold) so the need to have money in super is diminished for senior people and small balances.
Not for everyone
But running your own fund isn’t for everyone and people should think hard about whether they really want to manage their own money, especially as the compliance requirements of running an SMSF are considerable and the members can face severe penalties if they don’t run the fund within the law.
When it comes to finding the right administrator for the fund, although costs have come down as a result of technology and competition, people should be careful of using the cheapest provider.
Often, the cheapest providers don’t deliver the levels of service required by SMSF trustees. Ultimately the trustees are responsible for ensuring the fund is run correctly, and it isn’t worth taking on this risk for the sake of saving a few hundred dollars a year.
Interested to know what self-managed super (SMSF) is all about,
and if it is for you? See the slides SMSF Roadmap Overview.
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