The $200,000 SMSF Myth

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There is a persistent myth regarding SMSFs that most people who do even a little research will soon come across: an individual needs a minimum of $200,000 to profitably set up and operate an SMSF.

The ATO acknowledges that there is no legislative minimum stating that it is “not proposing a mandated minimum balance for SMSFs”. This seems to recognise that comparisons of SMSFs are too difficult given the variety and complexity of cost structures and the value of different funds.

It’s worth considering why $200,000 is often the rule of thumb, however, because it’s an indicator of the sort of costs that an individual should consider when deciding if an SMSF is worthwhile for them.

The Costs and Benefits

Is it really important? Let’s talk about the costs and benefits of a minimum of $200,000 SMSF investment.

Admin & Audit Costs

The amount of $200,000 is based on the assumption that administration and audit costs will be somewhere in the vicinity of $2,000-$2,500 pa or approximately 1%-1.25% of the fund, which is comparable to the fees of most retail or industry super funds. (It’s worth noting that admin fees for a SMSF vary considerably depending on your administrator.)

If a client were to assume all of the administration functions or use online services, then it would likely be less–closer to $1000. But many trustees, simply don’t have the time or knowledge to be confident administrators of their funds.

Financial Adviser Costs

If you were to use a financial adviser to help with your investments, it might cost you approximately $2,000 pa for their services which means costs are now $4,000 or 2% of a $200,000 fund.

Benefits

The cost of setting up an SMSF and the ongoing admin costs as a percentage of the fund (2%, let’s say) may seem hardly worthwhile in comparison to the fees of retail or industry super funds. BUT, if the value of the fund is likely to increase in the future then this percentage will decrease. Most people are attracted to SMSFs because they recognize that there are potential cost savings and greater investment opportunities (super borrowing, real property investment, and exotic and unlisted share investments) to take advantage of by managing their own funds.

Growth in funds

So, if your fund balance is less than  $200,000, but you expect to see better returns than industry or retail super fund, then it may be worthwhile to foot these costs.

Hopefully, it’s clear that there’s no precise “threshold” amount for deciding to move from your current fund to an SMSF. There are many costs and benefits to consider including years to retirement, family (estate planning), capital gains tax, insurance, and borrowing costs.

If you want to know if an SMSF is the right decision for you, opt-in for a free, no obligation chat with one of our specialists.

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