Is an SMSF right for you?

It may seem like everyone who’s anyone has a self-managed super fund (SMSF) if some advisers and property spruikers are to be believed. Yet the reality is that less than 5% of Australians with a super account have one.

According to the Australian Tax Office, at June 2022 there were just under 600,000 SMSFs with a total of over 1.1 million total members. Together, they held nearly $868.7 billion in assets, less than industry funds ($1,081 billion) but more than retail funds ($633 billion) or public sector funds ($634 billion).

In the five years to June 2019, the number of SMSFs grew by 9.4% while total members grew by 8.4%, although there are signs that the rate of growth may have peaked. For example, the year to June 2019 saw approximately 40% less new SMSFs established (20,427) compared to the year to June 2015 (33,743). 

The opposite trend is evident for wind-ups. Around 22,700 SMSF were wound up in the year to June 2018, compared to an annual average of 15,000 for the previous five years.

Number of SMSFs

Year ended	Establishments	Wind-ups	Net establishments	Total number of SMSFs	Total members of SMSFs
June 2022	28,129	7,675	20,454	597,264	1,112,102
June 2021	25,785	16,177	9,608	576,810	1,074,251
June 2020	21,696	17,280	4,416	567,202	1,062,868
June 2019	20,309	17,697	2,612	562,786	1,055,398
June 2018	25,310	25,165	145	560,174	1,050,343
June 2017	30,282	15,025	15,257	560,029	1,055,427

Source: ATO

There are many reasons for winding up an SMSF, including the death of a member. But in some cases, it can be assumed that people have realised running their own fund is not for them. More on why that may be the case in a moment.

Who has an SMSF?

According to the latest ATO statistics, 53% of SMSF members are men, while women make up 47%, a breakdown that has been steady for several years.

Not surprisingly, two thirds of members are aged over 55. Not only have older members had time to build up a big enough balance to make an SMSF cost effective, but retirees are likely to have more time on their hands to manage their investments and fund administration. However, the appeal of SMSFs appears to kick in around the age of 35 in both men and women, with 22% of all members now aged under 50.

In fact, the Investment Trends 2022 Self-Managed Super Fund (SMSF) Report found the average age of people establishing a fund had fallen to 46, down from 50 five years earlier. In common with older trustees, younger SMSF investors cited the desire for control as their main reason for starting their own fund. However, the report found younger investors were also more confident in their ability both to achieve better returns than APRA funds and to make better investments.

And contrary to popular belief, SMSFs are not limited to the super-wealthy. Most (51%) SMSF members declared an income of under $60,000. Of course, it’s highly likely that many of those declaring income of under $60,000 are either salary sacrificing into their SMSF or married to a higher income earner who is also a trustee of their fund. It also doesn’t distinguish between members pre- and post-retirement; as at June 2021, 32% of funds were fully in retirement phase, 52% were fully in accumulation phase and the remaining 16% had members in both retirement and accumulation phases.

What is apparent though is that SMSFs appear to benefit those with higher balances, with a smaller proportion of funds (13%) holding less than $200,000. This also reflects the maturing of the SMSF sector, as four years earlier 18% of funds had less than $200,000 in assets. (SMSFs can have up to six members and most have at least two people in the fund.)

It seems the message is getting through, because the Investment Trends report found the average super balance for people who had recently established an SMSF was $340,000. In some instances, you might consider starting with less. 

How much do I need to start an SMSF?

This may seem like a simple question, but the answer is it depends. A better question is how much I need to start an SMSF that will be cost effective, after taking into account the financial costs of running your own fund and whether the net returns after costs are competitive with APRA funds. The answer isn’t straightforward and will be different for everyone. (For more on the financial costs, see the section below.)

That said, after years of heated debate, extensive research on behalf of the SMSF Association has confirmed $200,000 is the minimum balance at which SMSF’s begin to be cost effective. 

As a result, in December 2022 the Australian Securities and Investments Commission (ASIC) dropped its hotly contested guidance that a minimum starting balance of $500,000 was necessary. It no longer mentions a dollar amount or a one-size-fits-all approach. Instead, it says the question of how much you need to set up an SMSF will depend on things like:

• Whether you are willing and able to undertake much of the administration and management of investments to make it more cost effective
• A large contribution will be made into the SMSF within a short (within a few months) timeframe after the fund has been set up.

The ATO advises it takes time and skill to manage an SMSF, but you can’t do everything yourself. Some tasks may need to be performed by professionals, for a fee. The total cost will depend on the nature and scope of the tasks you outsource.

What are the costs of running an SMSF?

Most public super funds charge a fixed percentage-based fee, which means the higher the balance the more you pay. Whereas many SMSF fees are fixed dollar costs, so the larger the fund balance the lower the total fees as a percentage of funds under management.

SMSF fees and costs fall into three areas:

• Set-up costs associated with establishment of your SMSF for things such as the trust deed, ATO application forms, investment strategy and professional advice. If you decide to use a corporate trustee structure instead of an individual trustee there will be additional costs.
• Ongoing administration fees. There are fees that all SMSFs need to pay to cover their annual compliance requirements, including the ATO supervisory levy, financial statement and tax return preparation and the cost of getting the fund audited by a registered auditor. The supervisory levy is a flat fee while other costs will depend on the complexity of your fund.
• Investment fees. These vary widely depending on the investments you hold. Direct property expenses can be high, shares, ETFs and managed funds less so.

Rice Warner’s Costs of Operating SMSFs 2020 report looked at funds of varying complexity and asset values. It estimated set up costs could range from as low as $1541 for a simple fund to a high of $2,459 for more complex funds. It found ongoing costs ranging from $1,189 to $2,453 per year, while investment fees typically range from 0.79% of total assets to 1.75% per year.

Running an SMSF might be cost effective with a $200,000 balance if you are willing and capable of doing a lot of the administration and investing yourself, without using advisers, and you plan to use low-expense investments like ETFs. But there will still be an annual bill for accounting and auditing. Rice Warner estimated that a $200,000 fund with simple investments and administration fees could cost as little as $1,329 per year.

Or you may be prepared to wear the extra costs in the early years because you expect to be able to contribute substantial amounts into your fund in the not-too-distant future.

So why choose an SMSF?

Many people embrace the challenge of taking charge of their day-to-day investments and are happy to invest their time researching the myriad options available. If you think you can beat the market and you have the stomach for making regular ‘big picture’ decisions, then you might be able to set up a fund that outperforms the big players.

SMSFs are also the only type of super fund that allow couples to combine their super in the one fund. This can have tax and other advantages when it comes to managing your finances, especially as you move into retirement phase and begin drawing down income.

Another big attraction of SMSFs is that, unlike APRA-regulated super funds, they allow you to purchase direct property investments in residential and commercial real estate, including your own business premises. SMSFs can also invest in cryptocurrencies and collectibles such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine. However, there are strict rules around holding these assets in an SMSF.

What else do I need to consider before setting up an SMSF?

ASIC’s MoneySmart website sums up the responsibility like this: “If you decide to set up an SMSF, you are personally liable for all the decisions made by the fund – even if you get help from a professional or another member makes the decision.” In other words, the buck stops with you.

Setting up a self-managed super fund (SMSF) can potentially supercharge your retirement plans, but they are not an automatic road to riches. They are also complex to run and involve lots of paperwork that can be time consuming and, let’s face it, boring.

If you’ve got an aversion to paperwork, and you have no interest in investing, then the simple fact is that an SMSF is probably not for you.

It’s also critical that trustees understand and comply with the SMSF rules so they avoid penalties for non-compliance.

You can get others to do the work for you (at extra cost of course) and you need to read the paperwork from the ATO and ASIC, your accountant, auditor, investments, platforms and insurers and often this requires immediate action.

Also bear in mind if you and your partner are trustees in an SMSF and you decide to go your separate ways, things can get messy. Around one third of marriages in Australia end in divorce. Unless the terms of the divorce are amicable, and they rarely are, then splitting your SMSF will involve family lawyers and large cheques.

Difficulties can also arise when the more active partner in the fund dies, leaving their spouse unprepared and under unwanted pressure at what is already a stressful time.

Running your own SMSF is not a magic bullet. It is simply an alternative investment vehicle for your retirement savings, albeit one with more flexibility and control than large APRA funds. For those who get it right, the rewards can be great. But getting it wrong can be costly, both in terms of your future financial wellbeing and your stress levels. So ignore the noise surrounding SMSFs and ask yourself if running your own fund is right for you.