The advantages of a self-managed super fund compared with other super investment vehicles include control, potential cost savings and flexibility. In some ways, the disadvantages are almost the reverse and will depend entirely on the fund and your professionalism.
For some people, an SMSF could turn out to be more expensive – particularly if your fund is small – and the investment performance may not be as strong as it may be with a professional manager. Two disadvantages that also can’t be ignored are that you take on considerable obligations, and you can spend many hours on administrative and compliance tasks.
Ask yourself three questions
Question 1: Do you want to control your fund’s investments and have the time, interest, financial knowledge (or access to professional advice) to do so?
Question 2 : Do you have at least $200,000 to invest in your SMSF or can you rollover this amount from another super fund?
Please note: There is no hard and fast rule as to how much money you should have in your SMSF to start. The accepted industry norm is $200,000 and that is the amount we at Switzer also work on. There are some unavoidable costs with running an SMSF – such as audit fees and the ATO supervisory levy – and on small amounts of money, it just does not make financial sense to incur these costs. In this case, industry super funds might be a much more cost effective alternative.
Question 3: Do you have the time, interest and ability to establish and maintain a fund in accordance with all the rules and regulations, or are you prepared to access professional assistance to do this?
If you answered “yes” to all these questions, then an SMSF may be right for you.
What will an SMSF cost me?
Setting up an SMSF is relatively straightforward. There are many service providers [1] (including your solicitor) who can help. The main cost is the establishment of the trust deed, which will typically cost about $500 to $700 depending on the complexity or specific tailoring required. If you are using a corporate trustee structure, then you will also pay incorporation costs (Australian Securities and Investments Commission fees and costs for preparing the company’s constitution) of around $463. Some service providers will bundle these activities as a package and in most cases, you should pay less than $1,500 to establish the fund. You may also need to pay for the preparation of the fund’s investment strategy [2] from your financial adviser or other provider. Alternatively, you can write your own. For an idea of what’s required, take a look at Switzer’s sample investment strategy [3].
Once your SMSF is established, the ongoing costs are really up to you as the trustee. You can do as much as you want or have the capacity to do – or outsource most of the tasks to service providers (including your accountant). Unsurprisingly, the costs follow.
Let’s break the potential costs into three categories:
- Mandatory
- Administration & Accounting
- Investment/Advice
Mandatory costs
The SMSF must be audited each year by an approved auditor and must pay the ATO Supervisory Levy in order to comply with regulations. Further, the fund is required to keeps its assets separate from the personal assets of its members, so it must maintain a separate bank account.
So, at a minimum, the fund will pay each year:
- Audit Fee (typically $500-$700);
- ATO Supervisory Levy ($259 for the 2014/15 Annual Return, and subsequent years);
- Bank Account Fees (typically $0-$120)
Administration and accounting costs
There are several companies that provide administrative and accounting support for SMSFs. Most accountants also provide some of these services, however with an orientation towards taxation and accounting advice. The services offered include:
- Record keeping of investments
- Preparation of the fund’s financial statements, investment performance reporting and members’ statements
- Preparation of the fund’s income tax return
- Advice on ATO rulings or legislative changes
- Trustees minutes and other trustee documentation
- Sometimes, a trust deed updating service
Typically, the administrator will charge around $1,500 to $3,000 a year for this service. Key drivers in relation to this charge are the level and frequency of reporting, and whether your fund has any ‘exotic’ investments such as artwork, collectables or even a commercial property. If the fund’s investments are in more regular assets such as listed shares, managed funds, listed fixed income securities and term deposits, these charges should be in the range quoted above.
If your accountant provides some or all of these services, then his or her charge is more likely to be time based, so the cost will depend on the nature of the work or advice you request and the overall relationship you or your business have with him or her. Importantly, keeping your investment records in sound order – not in a shoebox – will assist your accountant and, potentially, reduce the fees you pay.
It is important to note that you don’t need to use an administrator, or for that matter, an accountant. Depending on your time and interests, you can do all these tasks yourself. While you don’t need to use a particular piece of software, there are software packages that you can purchase that make record keeping and the preparation of statements and other legal documents pretty easy (see Service Providers [1]). The software licence and support charge is typically around $500 a year.
Investment and advice costs
The amount you pay in relation to investment and advice fees is based on whether you use the services of a financial planner as well as the extent to which you invest in professionally managed unitised investments such as managed funds and exchange-traded funds (ETFs).
If you use a financial planner for strategic and investment advice, you will typically pay ongoing fees of around 0.5% to 1% of funds under advice. Many financial planners will charge a flat fee, however, the fee will tend to be higher if the funds are higher. Advice fees may also be payable to your accountant or to other specialist advisers or publications, such as the Switzer Super Report.
If you invest in unitised structures such as managed funds or ETFs, the manager or product provider will typically charge an investment management fee. These fees vary from as low as 0.15% a year to more than 1.5% a year for funds that invest in offshore assets. While your fund will not pay the fee explicitly, it will pay the fee indirectly because it is deducted from the earnings of the assets and is reflected in the unit price of the managed investment. The fee is usually described as the management expense ratio (MER) and you should take a look at the MER before you invest in any managed product.
Other investment costs include the fees you pay to your broker or online broker for trading shares, commodities and bonds.