Do SMSFs need a minimum balance?

Christine St Anne | 30/10/2013

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Christine St Anne: Should SMSFs have a minimum balance. There seems to be a perennial debate in the industry. To answer this question, I'm joined by Olivia Long. Olivia, welcome.

Olivia Long: Thank you.

St Anne: Olivia, some experts in the industry are calling SMSFs to have a minimal balance of, say, even around $500,000. What's your view?

Long: Okay. At present, SMSFs don't need a minimum balance, and I'm of the firm opinion that we should be keep it that way. The Cooper Review in 2010, which was an extensive review into the superannuation industry, also agreed that SMSFs should not have a minimum balance in order to be established.

St Anne: But, Olivia, isn't it cost effective to run a larger fund?

Long: Okay. More cost effective than what, because I think for a long time now, $250,000 has been cited as the magic figure for an SMSF, and that's based on the average cost compared to the portfolio value. So, these days if we're not doubling it to 500,000, what are we basing that on? Is it on cost? Is it on size? There is no justification.

Earlier this year, ASX engaged Rice Warner to conduct a review into superannuation costs, overall. And what it actually showed is quite interesting. If we compare an industry fund, a retail fund, and an SMSF, let's look at your average two-member fund and a $250,000 balance. In an industry fund, the average cost of operating each year is $2,140. The retail fund was $4,540 as compared to an SMSF at $1,750. So that's our $250,000 balance.

So, let's now look at the $500,000 balance and your two-member fund. An industry fund fee, the median was $4,140. The retail fund was $8,940 compared with than SMSF at $1,999. So at $500,000, we're already seeing savings of up to $7,000, if you're purely basing it on cost, looking at SMSF compared to a retail fund.

St Anne: Okay. But is there any circumstances where SMSF may not be appropriate? Is there such a thing as maybe too low a balance?

Long: Okay. Again, I think logic does prevail, but it depends on the circumstances; how many members are in the fund, what is their starting balance, what are future contributions likely to look like. Do they have additional money that's about to come into them that they want to contribute to super. Are they looking to acquire property related to a business? There's a number of questions that people should be asking themselves.

For example, is a SMSF right for me? Do I understand investments? Am I willing to take responsibility for my retirement savings? There's a number of questions people should ask themselves before looking at the balance.

St Anne: Finally, Olivia, some regulators seem to be making some noises. Do you expect some increased regulation in the SMSF market?

Long: There may will be and I think the majority of it's likely to be around advice. But when it comes to a minimum balance, I'd say, let's look at the SMSF sector as it currently stands. The most recent stats we have indicate that 5 per cent of SMSFs have zero to $50,000 in their portfolio. A further 5 per cent of the sector is $50,000 to $100,000. SMSFs from $100,000 to $200,000 make up or represent 11 per cent. And 25 per cent have $250,000 to $500,000. So, if we're going to set – or set this expectation that the minimum level should be $500,000, already we're wiping out nearly half of the SMSF market; for what I see is no real good reason.

What I prefer people do is start to look at the rate of return and what people are actually doing within their funds. One of the clear benefits of an SMSF is to where to control an attention. I can't tell you how many trustees I ask, what the costs are they currently paying, they can't answer the question. So, it's not just about cost.

If you look at your average retail super fund, the average rate of return over the past 10 years has been just 3.4 per cent. So 3.4 per cent, which I think is pretty average as opposed to what I am seeing in self-managed funds. The SMSF stats are nearly double of that, but again we've seen other funds significantly outperform that.

So, I'd rather look at SMSFs and look at the opportunity that they provide, the flexibility, their providing terms of investments, and the likely opportunity as opposed to basing an opinion on the cost.

St Anne: Olivia, thanks so much for your valuable insights today.

Long: Thank you.


This report appeared on 2022 Morningstar Australasia Pty Limited

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