Many thanks to Christina from the SMSF Investment Strategies Blog for today’s post. Christina has been sharing a series a posts on the timely topic “Is a SMSF right for you?” Christina is outlining three key questions to ask yourself when deciding to establish a SMSF. Be sure to check 3 key questions to ask #1 Compliance#1 Compliance and #2 Time and Skills. This week she looks at Costs v Benefits; remember, if you’ve only looked at one of these aspects, you’ve done half a job!
Question 3 – Will the benefits be worth the costs?
Many people think that public super funds charge high fees but the true cost of running a SMSF may be more than what you are currently paying. Some accountants and SMSF setup companies like to compare the investment management fees charged by public super funds with the fees that they charge SMSFs for doing just the administration work. Administration fees alone can typically cost around $1000 or more each year as every SMSF needs to prepare a set of accounts, get it audited and file a tax return every year. On top of this, you will also need to factor in other investment management expenses such as the cost of financial advice, education to acquire investment skills, research to help you select the right investments, brokerage fees and other investment tools such as books and investment magazines. There is also the cost in terms of your own time in managing investments and maintaining records for your SMSF, and other miscellaneous costs such as the SMSF Supervisory Levy and audit insurance.
A quick rule of thumb that a lot of financial planners use to evaluate the cost/benefit is to look at the current balance of your super fund. If you have a balance of $200,000, and your current super fund charges an investment management fee of 1%, you will be paying about $2000 in fees each year. It is probably worthwhile to start your own SMSF (assuming you want control and have the time and skills to manage your own investments) because your administration fees will be around the same or less than what you are currently paying. If you have an aggressive contribution strategy, you could start with less. We started our fund with only $120,000 because we planned to contribute the maximum allowable amount of $50,000 per year (now reduced to $25,000) through employer contributions and salary sacrifice. If you have a balance of less than $100,000, you may find the cost of running your own SMSF is a lot higher than what you are currently paying in fees. Do your own due diligence by checking the actual fees you are paying. I was quite surprised how little some of the industry super funds charge when my daughter signed up with one of them when she started a part-time job.
Other than fees, another important consideration is what kind of returns you think you can generate through your planned investment strategy. If you don’t think you can out perform the best public super funds, it may be better to simply switch to a top performing fund, if you are not happy with your current fund.
There are many good reasons for starting your own SMSF but you must make sure you start one for the right reasons. For more good reasons for starting a SMSF, check out “Why have an SMSF?” on my blog.
The SMSF Investment Strategies website is aimed at supporting the Self Managed Super Fund (SMSF) Trustee and Retail Stock Investor community. I’d encourage anyone considering a SMSF to inform themselves fully, visit the site and take advantage of the knowledge and experience Christina has shared.
Article by Christina
Christina is a Trustee and Chief Investment Officer for SLI Superannuation Fund, a Self Managed Super Fund set up in March 2007. In addition to managing the investments for her SMSF, she also actively trades options in the US market for her family owned investment company.
Christina has written 3 awesome articles for us at Alan Lewis Accountants – BLOG
