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 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 an SMSF?
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.
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.
The obvious challenge in my case was that the fund obviously wasn’t particularly cost-effective for me for a long time.
This is why the tipping point for starting an SMSF is generally “the point in time where it is cheaper than the alternatives”. That’s a valid approach and generally depends on balance size because many of the fees for SMSFs are fixed dollar amounts but many of the fees for public funds are paid as a percentage of assets.
The challenge is, there is no perfect answer to the question: “How much super do I need to have before it is cheaper than the alternatives?” because the public fund’s percentage usually depends on where your balance is invested.
The conventional wisdom is that most SMSFs become cost-effective somewhere around the $200,000 to $300,000 mark – but it could be lower or higher depending on factors such as:
- Where you intend to invest;
- How much you intend to do yourself; and
- What the future holds.
For example, someone who wants very little involvement in investment selection, isn’t comfortable dealing with their super online (generally essential to get the lowest possible prices on SMSF services), is unlikely to grow their balance in the future (perhaps nearing retirement), has no spouse or children (so whatever is left on death will go to their estate regardless of the fund in which it is held) and doesn’t see any of this changing in the future might well find it is more cost-effective to remain in an industry fund or MySuper account even up to very high balance levels (beyond $500,000).
In contrast, someone who expects to choose a portfolio of listed shares, term deposits and cash, expects their balance to grow quickly and wants to plan for the future might find that an SMSF becomes cost-effective at a far lower point – even as low as $100,000.
So like most questions in superannuation, there’s no magic answer to when enough is enough in terms of starting your own SMSF – it depends.
Meg Heffron, head of customer, Heffron SMSF Solutions