How much money should I have in Super before it makes sense to establish my own SMSF?
This is a question which we’re often asked and which we often see discussed in SMSF circles. The ATO has provided a suggested figure of around 150k. Some advisers will suggest that a figure of $250-500k is an appropriate amount to have in your fund before it becomes worthwhile to establish an SMSF. One way to look at this scenario is to establish the costs involved in administering your SMSF. Realistically, you can expect to pay $1500 – 2000 in annual admin costs. So if you have an industry super fund, for example, you would need to have around 300k in your fund before your fees reached the same kind of mark as you would expect to pay for SMSF admin. Using this as your benchmark then, a figure of around 250k would be suitable to establish your own fund. However if you’re looking at using your SMSF for a different investment strategy than that which would apply to – a regular fund, then we’re no longer comparing apples with apples and need to look more closely at personal circumstances and what an appropriate amount to have in your Super might be.
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Let’s talk about money. A very topical issue in this industry and with our clients is how much money or how much superannuation should one or a couple, or a number of members have accumulated to start a self-managed super fund. There are lots of figures flying around, so we would speak to advisors who will say essentially, there is no figure. If people want to do it and it’s suitable for them, then let’s do it.
The ATO is talking about $150,000, we’ve got advisors and other groups which are talking about $250,000, $500,000, there’s a lot of figures floating around and all of which are coming just from people looking at it from a different angle.
The most common way that people look at this to sort of figure is in terms of the cost: how much does it cost to run a self-managed super fund? Nowadays, $1,500 to $2,000 a year is going to be a fair benchmark, maybe up to two and a half. I mean, you can go to the Paris end of Collins Street and pay $5,000, $6,000, $7,000, but most self-managed super funds would be administered around that sort of $2,000 mark and therefore, people think, okay, well, if you had your superannuation within industry funds, you’re going to need to have $300,000, $400,000 before you pay those sorts of fees. If you’re a retail fund, it might be $200,000 before you pay that sort of fee, so based on that, based on cost, they will go, well, you need to have $200,000 or you need to have $250,000, and that’s just purely a cost analysis going like, this is it, which is fair enough if you were going to use your self-managed super fund to have the exact same investment strategy that you’ve got in the other fund, then you’re comparing apples with apples and you’re going, “Which is the cheapest to burn that strategy?” and more often than not, you’ll find that your industry fund is going to be the vehicle of choice- and off you go.
However, if you are looking at having a different investment strategy, if you’re looking at doing something with your super fund which you are not doing with the other fund — which you can’t do with the other fund — then we’re not really comparing apples with apples anymore.
The question is, how much more are you willing to pay to have access to that particular strategy, to have access to that particular plan of yours which you want to implement? Because if the self-managed super fund costs you $1,000 more a year to run, but you believe that that strategy, that asset that you’ve got in mind is going to make you $5,000, $10,000, $20,000 more a year, then it’s a very reasonable decision. So that’s from a cost perspective and what you get for your money. I guess from where we see it, the brokers organizing the loan for the self-managed super fund, there are some realities that we now have to deal with. You need a 20% deposit because the banks are just going to lend you or your self-managed super fund more than 80%, so okay, we need a 20% deposit, we need money to cover for certain costs such as stamp duty, legal, bank application fees, audit fees, and those things that come with the purchase of a SMSF property, so we have 20%, we probably need 6%, 7% to cover all the various fees that come with the purchase of the property and then the banks now have something really annoying which is called liquidity requirement, so they will say you cannot use all the cash in your super toward the purchase of the property, so if you’re buying the property we want, and when I say “we,” that’s just the bank, that bank, we want 10% of the loan amount to stay liquid.
Liquid could be cash or shares, but that’s money that you can’t put into the property. Some of them will say 10% of the overall value of the fund, some of them will say 10% of the value of the property being purchased. There’s various requirements, but we’ve got, give or take, another 10%, so we were on 25% to 27% and then now, we find ourselves with at least another 8% to 10% on top of that. So the truth is that whichever way you look at it and costs aside and that argument aside, if you’re looking at buying a property with a self-managed super fund from a SMSF lending perspective, realistically, you’re going to need to have 30+% of the value of the property in superannuation, so if you own a $400,000 property, you’re going to need to have $120,000-plus to make this happen. If the property that you want to purchase with super is $600,000, then you’re going to be looking to have at least $200,000 in that superannuation fund. So it’s 30-plus, you’re probably closer to 35% than 30%. That’s from a lending perspective, everything else aside.
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