The decision to take control of your superannuation is not a simple one, with many factors to take into account.
The minimum balance required to launch a self-managed super fund (SMSF) is just one of these considerations.
The $200,000 myth
It is often said in financial circles that a minimum of $200,000 is needed to establish a new SMSF.
However, this is something of an urban myth. In reality, the Australian Securities and Investments Commission (ASIC) does not stipulate that there is a required minimum balance to begin a self-managed fund, although a large start-up amount is recommended.
The $200,000 figure is more of a suggested guide as to the minimum amount needed.
The effectiveness of the internet in revolutionising business has not been lost on the superannuation industry, and it has allowed web-based fund managers and service providers to render services at a lower cost than traditional operators.
This has meant that, in many instances, a superannuation balance well below the $200,000 threshold is more than adequate for transitioning into an SMSF, which in turn is opening up self-managed super as a viable option for a higher proportion of Australian workers.
Distribution of SMSF assets
The latest ATO figures on SMSF activity reveal that nearly one in five (19.1 per cent) of all self-managed superannuation funds contained less than $200,000 worth of assets. Somewhat surprisingly, 6.1 per cent of SMSFs had assets totalling less than $50,000.
While the data does show a slow decline in the proportion of SMSFs with assets totalling less than $200,000 over the survey period, this could easily reflect the advancing wealth of Australia’s ageing population rather than be an indication of SMSFs requiring a higher rate of capital to remain viable.
Determining whether or not an SMSF is right for you will depend more on the rate of returns you can achieve after the deduction of operating costs, as well as your skill and ability to manage your assets effectively, than the amount of start-up capital you have. As such, it is important to understand the various costs associated with managing an SMSF.
Management costs of SMSFs
The costs for the establishment and ongoing maintenance of self-managed funds are largely due to the strict governmental oversight of SMSFs and superannuation in general.
These costs include ongoing audit and accounting fees, insurance, and expenses associated with making and managing investment decisions.
There are also establishment costs, wind-up expenses and the value of your own time in managing the fund.
Additionally, the administration fee to operate an SMSF can be fixed or portioned to the superannuation balance, providing some flexibility to manage running costs.
The ATO explains that the estimated operating expenses ratio on SMSFs is at 0.50 per cent, providing anyone contemplating an SMSF with a guide as to how much cost to factor into their plans.
However, the ATO points out that those funds with higher balances had significantly lower operating cost ratios than those with balances below $50,000.
Bear in mind that $200,000 is nothing more than a suggested guide as to the amount required to establish an SMSF. It is clear that the more important consideration when investigating an SMSF is ensuring the investment returns, and even more so the start-up balance, are not consumed by operational fees and expenses.
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