How much money do you need to set up a self-managed super fund?

By Zarah Mae Torrazo

September 07 2020
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How much money do you need to set up a self-managed super fund? Let’s see how much starting balance you should have to make your SMSF a cost-effective and viable retirement option.

A popular question asked by prospective trustees of a self-managed super fund is: How much money do you need to set up a private fund?

While the Australian Securities and Investments Commission (ASIC) has identified a minimum balance to make SMSF a viable option for retirement in a published report, the regulator noted that it was in no way looking to mandate a minimum balance threshold when setting up an SMSF. ASIC stated that the vast difference in the costs in running a private SMSF across the industry and the individual trustee efficiency variability makes identifying the minimum balance for a cost-effective SMSF a tricky business.

Ultimately, the right minimum balance for everyone considering an SMSF is a fund balance that enables an SMSF to cost less than an alternative superannuation fund, such as a retail super fund.

In this article, we’ll look at the recommended minimum cost-effective balance for an SMSF and how you can manage with a lower starting balance.

What is the recommended minimum balance?

According to ASIC’s SMSF report, a minimum balance of $200,000 is required to make a private fund cost-competitive when compared with a large public fund, such as industry or retail funds. This is provided that SMSF trustees will undertake some of the administration responsibilities themselves rather than hire a service provider to take care of all the work associated with the fund. The research took into account the average cost of running an SMSF, with some funds that are cheaper to run and some that are more expensive, depending on fees charged and the service level required.

Among industry experts, the general recommendation for a starting balance is $300,000. But with the costs of establishing and managing a fund declining, due to technology and a rise in outsourcing practices, $200,000 is also a good figure when setting up your SMSF.

If you want to appoint an administration service that will provide full-time services for your SMSF, ASIC recommends the minimum fund balance to be around $500,000. With this figure, your SMSF will still be cheaper to run than other non-SMSF options.

What if I have less than $200, 000?

Can you still start your SMSF with a fund balance of between $100,000 and $150,000? ASIC says a private fund can be competitive against traditional retail personal super funds even if it has a starting balance below the $200,000 recommended threshold, but it will not be cost-effective compared with industry funds and the new lower-fee retail super fund offerings.

If you are looking to set up an SMSF with less than $100,000 in super savings, ASIC’s research found that $100,000 will only be cost-effective if you plan to make large super contributions or transfer super amounts from other funds within a reasonable time frame.

What are the risks of having a low SMSF starting balance?

If your financial resources are within the recommended starting balance, don’t be hasty in setting up an SMSF. Regulators say that while it is viable to start an SMSF with a low balance, it is not entirely advisable.

According to the Productivity Commission, SMSFs with less than $500,000 in assets are found to perform “significantly worse than standard super funds”. This was backed up by the ASIC, stating that too many investors are also setting up self-managed funds in inappropriate circumstances.

The government agencies said that most people who set up or join SMSFs are doing it because an adviser or an accountant has recommended that course of action to them. Financial professionals or advisers hype up expectations of the benefits that come with an SMSF but neglect to highlight the risks. This results in their clients getting a harsh reality check of managing an SMSF. Some people who join SMSFs are either underwhelmed by the results or overwhelmed with the work involved in running a private fund (especially if you are working with a low starting balance).

Conclusion

If you are considering setting up an SMSF with a scenario below the threshold, ASIC advises potential trustees to ask their adviser why an SMSF would be the best option. Make sure that your financial adviser presents all the pros and cons of becoming a trustee and level set expectations if you decide to set up an SMSF.

Meanwhile, those with significantly more than $200,000 should still be cautious. Aside from financial resources, SMSFs require a high level of commitment. As a trustee, you will be responsible for the performance and compliance requirements of the fund at some level.

To learn more about setting up an SMSF, explore nestegg now!

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Retirement