Many are taking the plunge and establishing a self-managed superannuation fund (SMSF) these days – especially the younger demographic – but it is not a decision that should be taken lightly. Do you know what the optimum conditions are to set up an SMSF, how it compares to APRA-regulated funds and what the average account balance of an SMSF should be to remain viable?

Luckily the Australians Securities and Investments Commission (ASIC) has helped us out by partnering with market research consultancy Rice Warner to find out what the minimum cost effective balance for an SMSF should be. We go into the various costs involved in operating an SMSF, and how these costs compare to APRA-regulated funds.

Note: Other than the costs involved, there are other issues that should be taken into consideration – from the time available and the expertise of trustees to the lack of guarantee, asset allocations that may incur extra costs, and dealing with falling balances, reduced interest and higher fees due to the increased need for assistance at older ages.

Costs for SMSFs

There is a wide range of professional service providers to the SMSF market – accountants, financial advisers, lawyers and administrators. Whether SMSF trustees use these service providers and the costs they pay depends on the preferences and capabilities of the trustees. Some choose to carry out as much of the administration and accounting as they can themselves and only use advisers for the services they cannot carry out, such as audits and tax lodgements. Others rely on service providers for all functions.

Costs for simple funds with little complexity where the trustee is seeking only transactional services will be at the low end of the range. Conversely, funds with more complexity where the trustee requires more assistance will generally be at the high end of the range. Each category below has high, low and mid point costs figures.

There are also costs that cannot be avoided such as statutory fees and the necessary provision of professional services.

These various costs can be divided into:

1)  Establishment costs

If an individual wants to operate an SMSF, the fund needs to be formally established. The costs associated with this include:

• the legal and related costs of establishing and registering the superannuation trust:
  • trust deed
  • Tax Office application forms
  • cash management account application
  • provision of binding death nomination forms
  • sample investment strategy
  • notice of election to become a regulated fund
  • general trust advice.
• the legal and related costs of establishing and registering the corporate trustee for those SMSFs that choose this route in preference to having individual trustees:
  • searches and reservations of company names
  • preparation of company constitutions, memoranda and articles of association
  • incorporation and registration of the entity, and
  • general corporations law advice.

It is recommended that a corporate trustee is utilised because it provides for simpler succession of trustees, inclusion of new members and the ownership of assets. Small business owners are urged to establish a separate trustee company separate from their business.

2)  Annual compliance costs

There is a range of fees that are necessary to operate an SMSF as they are either government charges or require professional support. Known as annual compliance administration costs, they include costs for:

• statutory charges
• financial statements and tax return, and
• the audit.

Table 1 below summarises the range of annual compliance administration costs for both funds that are accumulation only and for those that pay pensions.

3)  Non-standard asset charges

Most service providers levy extra charges if an SMSF holds non-standard assets or borrows to finance an asset purchase.

4)  Investment management fees

SMSFs make use of managed funds for a small proportion of their investments and as a result incur fees for investment management based on the size of their holding. There is a wide range of investment management fees charged in the market, ranging from simple index funds to actively managed funds for specialty assets:

5)  Full administration costs

Should the trustee not wish to be involved at all in the administration of the fund, they will incur higher fees for full administration services including investment accounting, access to online investment platforms, and investment analysis and reporting. These fees range from $2,225 for less complex funds to $7,200.

6)  Winding up an SMSF

The process for winding up the fund – be it due to a marital breakdown, migration out of Australia, or the desire to transfer the benefits – includes:

• preparing final financial statements for the fund
• having the fund audited
• lodging tax returns
• paying all levies
• paying or transferring benefits
• closing accounts
• notifying the Tax Office of the wind up, and
• deregistering any corporate trustees.

The levies are equivalent to those required for the annual operation of the fund. The final year costs for the SMSF will therefore be within the ranges specified for the operation of the funds.

SMSF costs vs APRA-regulated funds

The pros and cons of each minimum cost-effective balance in relation to APRA-regulated funds are:

• SMSFs with less than $100,000:  Not competitive and typically more expensive than all APRA-regulated funds, unless they can grow into a competitive size within a reasonable time
• SMSFs with $100,000 to $150,000: Competitive with more expensive and large superannuation funds (such as retail personal superannuation funds) but only slightly more competitive than retail funds, provided they carry out the broader investment administrative functions themselves
• SMSFs with $200,000 or more: Competitive with both cheaper and more expensive industry and retail funds provided the trustees undertake some of the administration
• SMSFs with $250,000 or more: SMSFs become the cheapest alternative compared with all types of superannuation funds, provided trustees undertake some of the administration
• SMSFs with more than $500,000: SMSFs is the cheapest alternative regardless of whether a trustee does or does not require full administrative assistance. Even if an SMSF of this size is paying higher fees than the typical APRA-regulated fund, it is because they may have more complex investment arrangements that are not possible within an APRA-regulated fund.

In conclusion, SMSFs are an expensive alternative to members with small balances. If you plan to outsource your SMSF administrative matters, you will need $500,000 in superannuation for your SMSF to remain a cost-effective option. If you are willing to perform at least some of the fund’s administration, you will need between $200,000 and $250,000 in superannuation, and it is necessary a fledgling SMSF grows to over $200,000 within two to three years of establishment to remain viable.

Consult this office for advice on whether you should make the transition, or if is the best option for your retirement savings if you are already in an SMSF.