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Determining whether you are wealthy enough to justify setting up a Self-Managed Super Fund (SMSF) involves more than just looking at your superannuation balance. While the Australian Securities and Investments Commission (ASIC) once recommended a minimum balance of $500,000 for an SMSF, this threshold has been revised down in recent years. Many now consider $200,000 to be a viable starting point for an SMSF, but being wealthy enough is about more than just numbers.
Cost Competitiveness of SMSFs
Research by actuarial firm Rice Warner indicates that at a balance of $200,000, an SMSF can be cost-competitive with traditional industry or retail super funds. When the balance reaches $500,000, an SMSF can actually be cheaper to run. According to the Australian Taxation Office (ATO), the average operating expenses for an SMSF were $6,400 in the 2020-21 financial year, with median expenses at $4,100. This means that being wealthy enough to cover these costs is crucial.
These costs are incurred at the fund level rather than the individual level, meaning they can be shared among fund members, such as you and your spouse. This cost-sharing can lead to efficiencies, especially since many of the expenses are fixed and not dependent on the size of your balance. Therefore, being wealthy enough to share these costs can make a significant difference.
Investment Performance
Research from the University of Adelaide, commissioned by the SMSF Association, found that an SMSF with a balance of $200,000 could achieve investment performance comparable to that of a $500,000 fund. This suggests that smaller balances can still benefit from the flexibility and control offered by an SMSF, provided you are wealthy enough to manage it effectively.
The Importance of Time and Commitment
Peter Burgess, CEO of the SMSF Association, emphasizes that beyond your super balance and fund performance, the key factor in determining whether an SMSF is suitable for you is your willingness to take on the responsibilities of a trustee. As a trustee, you are legally responsible for managing the fund according to its trust deed and superannuation laws. Being wealthy enough in terms of time and commitment is just as important as financial wealth.
The time and effort required to manage an SMSF can be significant, but the rewards can be substantial. One of the main benefits is the ability to pool your super balance with your spouse and invest together, potentially accessing investment opportunities that might not be available individually. This means being wealthy enough to invest time and effort can lead to greater financial rewards.
Engagement with Retirement Savings
“The more engaged you are with your retirement savings, the better results you will generally achieve,” says Burgess. This engagement can lead to more informed investment decisions and better financial outcomes. Being wealthy enough in terms of knowledge and engagement is crucial for success.
Mitchell Markwick, a partner at HLB Mann Judd Wollongong, agrees that an SMSF is suitable for those who want to control their own investment strategy or use their super to buy an investment property. However, he stresses that the decision should be based on your intention and investment strategy, not just your balance. He typically recommends a starting balance of $750,000 for his clients, ensuring they are wealthy enough to meet their investment goals.
Seeking Professional Advice
While more people aged 35 to 45 are showing interest in setting up SMSFs, Burgess notes a concerning trend of individuals doing so without seeking financial advice. “We would like to see individuals seeking professional advice from an adviser who is a specialist in this area,” he says. Being wealthy enough to afford professional advice can help you navigate the complexities of managing an SMSF.
Although it is possible to establish and manage an SMSF without professional help, all SMSFs must be independently audited annually by a professional. This ensures compliance with regulatory requirements and helps maintain the integrity of the fund. Being wealthy enough to cover these audit costs is essential.
Current Landscape of SMSFs
As of March, there were 616,400 SMSFs in Australia, with average assets of $1.45 million in the 2021-22 financial year. This data highlights the growing popularity and substantial assets managed within SMSFs, showing that many Australians are wealthy enough to benefit from this retirement savings strategy.
In conclusion, while having a sufficient super balance is important, the decision to set up an SMSF should also consider your willingness to engage with your retirement savings, the time you can commit to managing the fund, and the potential benefits of pooling resources with your spouse. Being wealthy enough in terms of financial resources, time, and commitment is key. Seeking professional advice can help you navigate the complexities and make an informed decision.
Read more at AFR.
