Bigger isn’t always better, but when it comes to self-managed super funds (SMSFs) new research shows that size really does matter.
The number of Australians choosing to manage their own retirement nest egg has skyrocketed in recent years. Figures from the Tax Office show there are now 577,000 SMSFs nationally, up from 440,000 in 2010. These do-it-yourself funds collectively hold $622 billion in assets – almost one in every three dollars invested in our super system.
Running your own super fund can be rewarding. But it’s not for everyone, and it can be an expensive option if you have limited super savings.
Along with the initial outlay required to establish a fund, SMSFs also face a variety of costs associated with meeting legal and reporting obligations as well as managing investments.
These expenses can rapidly eat into your super savings. In fact, having at least $200,000 in super is regarded as a key benchmark for SMSFs to be financially worthwhile.
A recent study by SuperConcepts and the University of Adelaide found SMSFs with balances below $200,000 face higher expense ratios than larger SMSFs. Let me explain. Tax Office data shows that in 2015 SMSFs faced average total running expenses of $12,200. That’s a far higher proportion of the funds invested in a small fund than it is for a larger SMSF.
The same survey also found it is harder for small SMSFs to achieve a high level investment diversification, and as a result the fund returns can be lower.
Interestingly, this research confirms earlier findings by investment watchdog ASIC that SMSFs with less than $200,000 in assets are unlikely to be competitive compared to a professionally managed super fund. Sure, there are times when it may be fine to start your own super fund with a small balance. You may, for instance, be expecting to make a substantial contribution in the near future following the sale of a business or through an inheritance.
It is possible to save on costs by taking on much of the fund’s administration and investment management yourself. However, you need to know what you are doing – and have the time to devote to managing your SMSF. Not surprisingly, many SMSFs outsource some, if not all, of the investment, accounting and tax work to professionals.
The main point is to carefully weigh up the decision to use a SMSF – preferably with the benefit of expert advice, especially if you have a modest nest egg. Compare the cost of using a SMSF with the fees you’ll pay in a professionally managed fund – this is an area where your financial adviser can help. After allowing for the value of your own time, you may find it is cheaper (and easier) to invest your super in a large, well-run fund.