So Self-Managed Super Funds can be expensive to run?
That was a worthwhile finding from the Productivity Commission’s draft report into superannuation released last week, which concluded that you might be better advised to hold off setting up an SMSF until you can muster around $1 million.
Below that figure, the Commission noted that your SMSF is more likely to have much higher costs than conventional pooled super funds and perform “significantly worse”. Above $1m, costs were found to be pretty comparable with APRA-regulated funds.
As an SMSF user with my wife for some years, the news that it can be expensive hardly knocked me off my chair. But the $1m figure was a tad more eye-catching.
Yes, the report threw up a fresh round in the tired old industry versus retail funds debate. But given guides previously put the “worthwhile or not” figure for SMSFs at around $200,000 and it’s the biggest part of the super pie these days – at $699 billion across more than one million SMSF accounts – many Australians may be more concerned with doing the sums on their self-managed strategy.
The Commission’s advice about low balance SMSFs may put people off, but that might not be a bad thing for some. As the report noted, by the time you include set up costs, annual fees for funds with less than $100,000 in them can hit 16 per cent a year.
People already seem to be cottoning on: the Commission found the number of new SMSFs with balances under $100,000 has fallen from 35 per cent of new establishments in 2010 to 23 per cent in 2016. But to be frank, that’s still quite a high number.
The Commission said that the average annual SMSF cost per member had climbed from $5100 in 2013 to $7300 in 2016 and that it’s administration and operating costs rather than investment costs that are the main reasons for the increase. Given that investment costs correlate fairly closely with the scale of the fund, you can see the merit in growing the sheer size of the SMSF to ensure the expensive but relatively fixed administration costs take up less space overall.
But costs are not the whole story. As has been made clear in recent years, it all comes back to the strategy behind setting up an SMSF in the first place.
And there is a number of good reasons beyond the standard (and valid) line that it gives you more control.
One is that it’s the only structure that still allows you to increase your super balance via what’s called a Limited Recourse Borrowing arrangement. This requires an extra structure to be put in place to ensure that if you buy a dud with the money you have borrowed, your savings will be quarantined: hence the name Limited Recourse.
Most people assume that the LRBA facilities are all about borrowing to buy property. But in fact it’s quite possible to use an LRBA to buy blue chip shares as well.
As Michael Caine would say, not many people know that.
Notably, the Commission deemed that the systemic risks of such borrowing were worth monitoring but were low, given that only 7 per cent of SMSFs by number and 4 per cent by assets had some form of limited-recourse borrowing arrangement.
The other big advantage of SMSFs is for small business owners, who get a carve out from the rule that says you may not do business with yourself. It’s called the BRP (Business Real Property) strategy and it allows you to use your SMSF to buy your own business premises, plus leverage other tax advantages both during your working life and once you retire.
Ask your adviser or accountant.
Super is like that, for better or worse: there are still good ways to get ahead, but you need know what they are.
The views expressed are those of the author and do not necessarily reflect those of the Westpac Group. This article is general commentary and it is not intended as financial advice and should not be relied upon as such.