Is a SMSF a good fit for me?
Whilst the benefits of a SMSF may seem appealing, the reality is that SMSFs are not for everyone. Before going ahead and establishing a new SMSF, you need to take a moment to understand the requirements of being a trustee, and what it means to maintain a SMSF before you commit.
Here are the key issues to consider before committing to starting a SMSF.
When you establish a new SMSF, you are committing to becoming the trustee of the fund (or alternatively the director of the corporate trustee), and this in turn comes with responsibility. Why is this such a big deal ? Because the trustee of a SMSF carries the legal responsibility for all decisions taken by the SMSF, including running the fund throughout the year, and organising the annual accounting and audit of the fund.
Sure, you can get professional help with these (as most do), however when all is said and done, you, the trustee, carry the ultimate responsibility for ensuring your fund remains compliant with the laws that govern superannuation. Pleading ignorance is not a defence.
You need to have an awareness of what you are able to do / not able to do in terms of the rules and regulations, and commit to adhering to being a 100% compliant super fund.
You will also need to establish an investment strategy for the fund, which implies an involvement in your superannuation that you may not have had when in an industry or retail super fund where all such decisions were made for you.
That may mean a total DIY approach where you make all investment decisions, or it can mean using professional assistance such as using investment research to make those decisions, or it can even mean making life easy by using fully managed portfolios (that are not available in other larger super funds). Either way, you need to have a certain level of involvement and engagement with the investing of your SMSF to really ensure this is a viable vehicle for you.
There is a scare tactic out there (generally perpetuated by those with self interest) that SMSFs are a terrible administrative burden, and that the paperwork and other requirements are overly burdensome.
That is simply untrue. With nearly all SMSFs making use of professional accounting and audit services at year end to complete their annual returns, the vast majority of funds are fairly painless to manage.
However this come with one caveat – they are only painless IF YOU ARE ORGANISED.
Without doubt, one of the key reasons we have seen trustees get into trouble over the years is due to being completely disorganised, particularly where they can not find documentation to support the transactions of the fund.
However, if you are organised and you maintain your records over the course of the year, then the SMSF can most certainly be a viable super fund vehicle with a relatively simple administrative load.
Due to the ongoing administration and audit costs of a SMSF, it is generally accepted that you need a certain level of funds in your superannuation account (combined with the other potential members of the fund) to make it cost effective & worthwhile to establish in the first place.
There is a figure that is often quoted, which is that you need $200,000 in combined super for a SMSF to be viable. However, we would challenge the idea of fixed figure, as it really all comes down to your assumptions, particularly around how much those annual costs actually are, and how much (as a percentage of your fund) are you willing to pay.
The fact is that there is a wide variance out there in terms of what SMSF administrators will actually charge. If we take an average cost of say $2,000, then on an account balance of $200,000, you would be paying around 1% of your balance in costs. That compares in line with a variety of other large super funds out there, and hence where this $200,000 minimum came from.
However, what if your SMSF administrator only charged you $1,000 (yes, they do exist), particularly if your super fund’s investments and activity are relatively straight forward? This would all of a sudden mean that a $100,000 SMSF balance would also have a cost basis of 1%.
So as a broad guide, if you can keep those fixed annual costs down, then $100,000 of combined balances is certainly reasonable. Lower balances than this may also be feasible, if you have increased contributions coming in over the next few years and you also keep those fixed costs down.
What is clear is that small funds (for example with around $20,000 to $30,000) are generally too small to be SMSFs as the ongoing costs are just too high of a percentage of the fund’s expected (or possible) returns.
And remember, the amounts we are talking about here are the combined balances of the members of the SMSF which can have up to 4 members.