Self-managed super funds continue to grow in popularity. According to Australian Tax Office figures, more than 30,000 new funds were set up last financial year, taking the total number of SMSF members over one million.
Industry and retail super funds are fighting hard to staunch burgeoning investor uptake of SMSFs. They’re spending up big on advertising and lobbying politicians to change the rules, warning of the downsides to self-managed super. One rule they’d love to see introduced is a minimum balance.
Five to 10 years ago, the rule of thumb used to be that if you had $200,000 in super you should consider an SMSF. It wasn’t much of a rule of thumb, since the balance required depends on a myriad of personal factors. But in any event, it was probably too low, considering your accountant was likely to charge you $3000 or more just to do the annual admin.
But times have changed.
If you haven’t spent the past five years on a remote island, you’ll know that central banks have been flooding the world with cheap debt. The result has delivered an escalation in asset values – especially for share markets and property prices. Those of you who have kept an eye on your super balance will have noticed how much values have ballooned. For instance, Australian Super’s High Growth option has returned 11 per cent a year since July 1, 2009.
If you were a member (of this fund) with a $200,000 super balance back in 2009 you’ve now got more than $400,000, assuming average, compulsory contributions. If you’ve made extra contributions you could have a lot more.
That’s good, but what’s not so good is that the fees you pay (which are charged as a percentage of your balance) have risen by an equal amount. In 2009 you would have been paying $1500, now you’re paying $3000. Not that you get any more, the manager has just got more of your money to play with.
At the same time, fees on self-managed super, which are largely fixed, have fallen. Highly automated data processing, coupled with online administration, means that SMSF administration costs have fallen from $3000 or more, to $2000 or less. Depending on what risks and limitations you’re prepared to accept, you might be able to get it done for less than $1000.
A switch to an SMSF in 2009 would have cost you $1500 a year, before taking into account any other expenses you’d incur (such as research, advice and managed fund fees). But switching the same account now would save you $1000 to $2000, leaving money left over to pay the optional expenses.
Remember, the decision to set up an SMSF should be about far more than balances and costs. SMSFs have benefits, including better term deposit rates, access to more investments and greater tax flexibility, but there are also risks, like breaching the SIS Act or making poor investment decisions. You need to think about how these apply in your circumstances.
But if you’ve been put off by “minimum balance” and “costs” talk in the past, it could be time to take another look. SMSF administration costs have fallen considerably, and super account management costs have risen, at a rapid pace.
I’m not advocating that you set up an SMSF. Given that a portion of the current million SMSF members may end up regretting their decision, you should definitely seek genuine, independent personal advice before joining the herd. But if you’ve got the right mindset and attitude to run your own fund, now is a very good time to question whether an SMSF is right for you.