Amount of super required
There’s no hard rule on the amount of super needed to set up an SMSF. You should consider whether setting up and running the SMSF will be cost-effective. SMSF costs may be proportionally higher for funds that have lower balances. The more you choose to outsource, the more the cost of these services can dilute your returns. The relative cost of your fund will also depend on what assets you choose to invest in.
Another consideration is diversification. Ideally you want to spread your risk by accessing a wide range of investments. For people with a smaller SMSF balance, it may be more difficult to spread risk.
An SMSF involves both set up and annual running costs, which includes any investment-related expenses in addition to accounting, legal and tax advice, the cost of having your fund audited each year and an Australian Taxation Office (ATO) supervisory levy. Depending on circumstances, these fees may be more than other super funds.
SMSFs also require an investment of your time. This includes managing and administering the fund, doing paperwork, keeping up-to-date with compliance changes and researching investments.
If you’re thinking of setting up an SMSF, it’s important to understand the risks that don’t apply to other super funds.
- Over the long term you should be confident that you’ll be able to generate a return that compensates you for taking on the investment responsibility. Good advice and a long term strategy are crucial
- You’re ultimately responsible for the operation of your SMSF, which includes complying with a range of important duties, laws and rules. Not complying can result in significant penalties
- In the event of fraud, you’ll not have access to the compensation arrangements that apply to large super funds - you may lose a substantial amount of your retirement wealth in the event of fraud
- Members of SMSFs don’t have access to the complaints body - a key way that members of other funds can resolve disputes in a timely and low-cost manner. In an SMSF, you may instead need to take legal action to resolve disputes which can be costly and time consuming
- Life and disability insurance cover may be more difficult or expensive to get with an SMSF
- A change in circumstances e.g. bankruptcy, relationship breakdown, loss of mental capacity, becoming a non-resident, reduced superannuation balance could mean that you’ll want to (or have to) wind up your SMSF. It’s important to understand that costs may apply and prepare an exit strategy for this future risk
For more on SMSFs, watch the ATO SMSF video series.