Is there SMSF Minimum Balance?

Deciding whether to set up your own self-managed superannuation fund (SMSF is a complex decision. There are many factors you need to consider. One of those factors is whether there is a minimum balance you need to have in super before you can set up your own SMSF. So is there actually a minimum in super you are required. But is there an actual minimum balance required? 

Although there is lots of commentary out there that you should have between

$500,000 and $1,000,000 as a minimum there actually is no set minimum amount that you need to have to set up an SMSF. Nowhere in the law does it say what the minimum is you need to have in super before you can set up an SMSF.  

The Australian Securities and Investments Commission (ASIC) does have a guide as does the ATO of  $200,000 they suggest you ought to have for it to be cost-effective for members.

 

So you do you determine if an SMSF is right for you?

This will depend on the rate of returns and the operating costs as well as your skill and ability to manage your assets effectively. This has nothing to do with the start-up capital you have. So it is important to understand the various expenses associated with managing an SMSF. 

There are many costs associated with the setup of an SMSF set up and the ongoing operating costs as well as the potential wind up costs. These all should be considered when deciding whether to establish an SMSF with a low super balance. What is important is whether the balance of the SMSF makes it cost-effective for the client.

There are initial SMSF setup costs –  trust deed establishment fees, Tax File Number and ABN Registration. Annually there is the SMSF Supervisory Levy, SMSF accounting fees and SMSF audit costs.

Where you have a corporate trustee there will also be Company Annual Return Fees. Where you have a special purpose company set up as trustee of the fund the this Annual Return fee will be lower than the typical annual return fee.

Other ongoing costs include advising fees and investment fees as well as fund auditor fees.

The ongoing costs of running an SMSF can vary depending on the complexity of the fund’s investment activities. An SMSF may not be cost-effective if you have a low super balance but this also depends on the structure and the number of members.

How do the SMSF costs with a low super balance compare to other retail superannuation funds? 

Comparing costs of an SMSF with a low balance to other retail funds can be difficult since there are other costs to the company and they do no directly compare.

However, with an SMSF it is easy to compare the fees as they are readily identifiable since the member is the one paying the bills, unlike other retail funds where the member might not be aware what they are paying as there are certain fees and costs that are hidden and not clearly identifiable. 

The Investment Strategy and Objectives will determine the costs and performance of your SMSF.

The type of investments you hold and therefore the Investment Strategy and Objectives the members of the SMSF have will determine the costs and so if you have a low balance then you will need to consider if you can sustain the costs associated with the investment strategy you have.

Where you would like to invest in property - residential or commercial property etc then you can only have this time of objecting in an SMSF. 

So if this is your objective and it is only possible with an SMSF then this may be the option you will need to consider. As part of your consideration you will there need to ensure you have enough in your super, to begin with to be able to undertake a property strategy.

Therefore, there is no "minimum balance" that predetermines the feasibility of an SMSF. There are many factors to consider and most importantly you are in control and it will depend on what your strategies and objective is.

There is an ASIC requirement to help prevent financial advisers from encouraging people to establish an SMSF when it is not in their best interest – best interest duties.

The best interest duties require an Adviser when providing advice to establish an SMSF with a low balance to clearly set out:

The circumstances that show the client is likely to end up in a better position, despite the SMSF having a low starting balance.

Consideration of whether the SMSF’s intended investment strategy is appropriate and viable and what the trustee goals. The reasons why setting up and operating an SMSF is in the best interests of the trustee.

Estate Planning may be another reason for establishing an SMSF

Estate planning issues may be a reason to establish an SMSF with a low balance instead of having the amount in an ARPA fund. Where there is a blended family an SMSF may prove to be more appropriate than an APRA fund due to the ability to have non-lapsing binding nominations in place and to have control over who to appoint as the trustee of the fund. This can alleviate the possibility of legal disputes between any potential beneficiaries. 

Most other retail Funds only offer members the ability to make binding death benefit nominations (BDBN) with a single-tier level of nomination, while in an SMSF the member can have a nomination with multiple tiers.

With an SMSF it is possible for death benefits to be paid as a pension to a death benefits dependant rather than as a lump sum, which means the fund doesn’t need to be wound up. The fund’s investment portfolio can remain intact and the lifespan of the SMSF extended – a benefit not always available with other retail Funds. There can also be arrangements to pay an SMSF balance to a specific beneficiary as a pension without giving them access to the capital but you need to make sure the Trust Deed enables these proposed strategies.

Summary

In conclusion, if you think your investment strategy or objectives require you to have an SMSF to achieve your objectives with your superannuation then you should seek financial advice to determine if this is the case as it is not just determined by the balance of your superannuation fund.

To ensure an SMSF is right for you and your objectives then it is best to get the right advice as the SMSF will be set up for a very long time. It is not so much what your current super balance is that should determine your answer to this question. Most SMSF start off small and then grown over time.