If you’ve followed the financial section in the last 12 months you’ve probably heard about Self Managed Super Funds or SMSFs. It has been a bit of buzzword and largely driven by people who want more control and better returns from their Super. The thing is almost everything you read about setting up your own super fund seems to tell you it’s only worthwhile if you have at least $200,000. But is that really true and why $200k?
We got guest writer Nigel Bowen back in to provide you with some more insight on the subject:
Self-managed super funds (SMSFs) are increasingly moving from the margins to the mainstream of Australia’s superannuation industry. A decade ago, SMSFs controlled barely 10 per cent of the money sloshing around in the nation’s super funds. Nowadays, there are 470,000-odd Australian SMSFs that control a third of the nation’s super money, which translates to $415 billion currently being invested by everyday Aussies.
What’s with the magic $200,000 figure for SMSF savings?
It is not a legal requirement to have $200,000 to set up a SMSF. In fact, you can create one with a quarter of that amount if you so wish. So why will everyone from the Australian Securities and Investment Commission to your local financial planner strongly advise you not to bother unless you have $200,000?
The maths works like this: according to Trish Power, author of DIY super for Dummies, the start-up costs for a SMSF can range from free (with strings attached) to up to $2,200. On average, it will fall in between these two figures and will likely cost around $2000 a year to run.
On average, a retail superannuation fund will charge you 1.37 per cent of your balance in administration and investment management costs. Given that SMSFs involve a flat fee and industry or retail ones a percentage of the balance, SMSFs become progressively more attractive as you accumulate more money in your super account (you’ll pay someone $13.70 to manage your super investments if you have $1000 in their fund but $13,700 if you have $1 million invested). The tipping point where there starts to be a clear benefit to taking over the management of your super rather than outsourcing it is $200,000.
Why it’s a little more complicated than made out
As a general rule of thumb, there’s a lot to be said for the average person not starting a SMSF without having $200,000, but there are always exceptions to the rule.
If you’re considering setting up your own fund for increased SMSF savings, the thing you need to focus on is not how much money you do or don’t have, but whether you believe you can make smarter decisions about how to invest your money than the army of highly paid experts that retail and industry super funds have at their disposal.
Surprisingly, the answer to this may well be yes. It’s now a matter of record that most supposed financial experts failed to see the GFC coming and that Australian super funds have, by and large, generated disappointing returns on their members’ money over the last five years.
One other thing to take into consideration in setting up a SMSF is the investment of time involved. Even if you can equal or better the investment returns achieved by professional super fund managers, you may not wish to engage in the time-consuming and often tedious tasks involved in managing your own super fund.
How hard are your savings working SMSF?