There is increasing debate in the industry around what minimum balance should be required in order to make an self-managed superannuation fund (SMSF) effective, writes Xpress Super chief executive Olivia Long.
In short, there is no minimum balance required for an SMSF
to be an effective retirement savings vehicle. I know that's not the view of the Australian Prudential Regulation Authority-regulated funds, but I think it's fair to say they are hardly objective when it comes to this issue.
They argue that $500,000 should be the starting point. They also argue that potential trustees should be the font of all knowledge when it comes to investment and the regulatory environment. The concept of setting in stone qualifications for people wanting set up an SMSF
has even been mooted.
As you would expect, I couldn't disagree more. My starting point is that cost is the wrong way to approach this issue. But even if you accept that the cost of running an SMSF
should be the guiding principle, then the argument that advocates a $500,000 minimum simply can't be sustained.
Let's have a look at some numbers produced by actuarial firm Rice Warner. Taking a $100,000 balance, they estimated the average cost of running an industry fund, retail fund and SMSF
at $936, $1,608 and $1,594, respectively.
So, an SMSF
is competitive already with a retail fund.
Increase the balance to $250,000 and the industry fund costs $2,136, its retail counterpart is $4,540, while an SMSF
is $1,750 – 18% cheaper than the industry fund and a whopping 61% cheaper than its retail equivalent.
At $500,000, the statistics are even more damning for the APRA funds, with the industry fund costing $4,136, retail at $8,940 and SMSF
at just $1,999.
On these numbers, the figure of $500,000 is simply nonsensical – if you wanted a cut-off point based on cost, then clearly it should be $250,000 compared with an industry fund and just $100,000 for a retail fund. Some "expert" just thought of a number and doubled it!
But to my way of thinking, focussing on the cost of running a fund – important as it is – misses two critical elements to the debate. First, it often means there is a lack of analysis on the rate of return, surely a critical consideration for a long-term retirement savings vehicle.
After all, if a fund's rate of return is not important, why do our industry and retail counterparts trumpet their good years and give a good imitation of a Trappist monk in the bad years?
On the basis of return, SMSF
s are competitive with the industry and retail funds. Over the past decade, retail funds have delivered, on average, 3.4%. I am quite certain many SMSF
trustees have outperformed that average return.
Second, it tells those people - often younger people - that they don't have the skill set or knowledge to take control of their own retirement savings. Surely in today's society we should be encouraging people who want to take responsibility for their retirement to do so.
Provided these people do their homework and have a full understanding of what's involved in running an SMSF
, then there is no reason to set an arbitrary limit to warn them off.
But don't just take my word for it. In 2010, the Cooper Review, which took the last definitive look at our superannuation system, reached the same conclusion.
Article first published by Morningstar.