Long has lived the notion that SMSFs are over-priced and over-complicated unless the balance is north of $500,000 – but times are changing. SMSFs are now proving their strength in the cost-competitive arena. Industry research found that funds with balances of only $200,000 are as cost-competitive as public offer funds (“regular” superannuation funds). Are SMSFs are becoming the most affordable way for Australians to reach their retirement dreams?
If you’ve been put off SMSFs due to their expensive reputation, keep reading as we explain how self-managed super funds are rebuilding their cost repute.
What research was conducted around SMSF cost-effectiveness?
In late 2020, the actuarial firm, Rice Warner, was commissioned by the SMSF Association to conduct extensive analysis into the operating costs of SMSFs. Consequently, the Cost of Operating SMSFs 2020 report was released and has shed some positive light on the cost-effectiveness of running a self-managed super fund.
In 2013, the Australian Securities and Investment Commission (ASIC) also commissioned Rice Warner to conduct a similar exercise. The latest report updates the 2013 data and uses it as a benchmark to compare the current findings against.
The ATO also released a statistical overview for 2017/18 in mid-2020. Collectively, the results are a beacon of hope for those who previously thought SMSFs were not a viable option for them.
Why are SMSFs now as cost-effective as Public Offer Funds?
The improvements in SMSF cost-effectiveness against Public Offer Funds comes down to two main factors:
- Better accuracy in the data
Previous analysis of the running costs of SMSFs created somewhat of a deceptive perception of how expensive it was to run an SMSF. The data considered SMSFs with balances that exceeded $2million, which heavily skewed the data. The Chief Executive of the SMSF Association commented that previous studies lacked balance and ignored the optional expense components, pointing out the flaw in using averages and aggregate expense data.
Thankfully, the 2020 reports provide more indicative data about the annual expense of running an SMSF and better reflects the actual cost. The ATO overview breaks down median and average expenses by fund size and type. It also streamlines ‘operating expenses’ into auditor fees, management and admin expenses, as well as the SMSF supervisory levy. More detailed data has allowed a better reflection of the true running costs of SMSFs.
- Costs for APRA-Regulated Funds have risen, while SMSF costs have fallen
Since the 2013 report by Rice Warner, there has been a reduction in fees for SMSFs, whereas industry funds have seen an increase in fees. Technology, super reforms, and investment trends and enhancements all play a role in the rise and fall of operating expenses to super funds.
What is the average cost of running an SMSF?
One of the main drawcards of SMSFs is how uniquely they can be structured to suit their members. As such, it can be tricky to rely on averages when considering the cost. However, if only basic operating expenses are included, the ATO statistics indicate that for SMSFs established with balances between $200,000 – $500,000, an estimated median yearly expense would be around $3,400. This is exciting news as it opens up SMSF ownership opportunities to younger, millennial investors. Unlike their older peers, millennials have always had mandatory super contributions on their side and are likely to hold stronger balances compared to previous generations at the same age.
What are the benefits of a Self-Managed Super Fund over a regular superannuation fund?
Undoubtedly, the ability to manage and select tailored investment options within an SMSF is the biggest feature that Public Offer Funds simply cannot compete with. This includes the ability to purchase direct property through the super fund. With SMSFs now more affordable than ever, it’s becoming easier for everyday Australians to take charge and invest in property through their own self-managed super fund.
Talk to us today about how to start your journey to SMSF ownership and SMSF property investment.