Diary of a self-funded retiree: Entry 6
Welcome to the sixth update in my retirement journey diary. In my previous entries, I've shared details about how we've simplified our financial lives, our investment strategy, our retirement budget, our plans for downsizing and supporting our kids and how we plan to stay healthy and keep our minds active in retirement.
Diary entry 6: What it takes to run our SMSF
In this diary entry, I am focusing on our SMSF - why we set one up, the time and costs involved in running it and what we'll do when we can't manage it ourselves.
We set up the SMSF about 20 years ago, following advice from an accountant who said SMSFs give you more flexibility and can offer tax advantages on contributions. I did take advantage of the tax perks at the time by rolling over a small gain from selling a business without paying capital gains tax, but I haven't used other potential benefits such as the downsizing allowance.
What does it cost to run an SMSF?
Running an SMSF can be expensive. ATO figures show the median management and administration expense is about $3,166 a year, while the median auditor fee is $550. The averages are slightly higher, at $4,861 and $641 respectively. This doesn't include investment expenses, insurance premiums, interest expenses (if you have borrowed) and a few other costs.
The bigger the fund size, the higher the management and admin expenses generally are, which is largely due to large SMSFs holding complicated assets, like private companies, farms and large commercial property.
Our goal is to keep our costs as low as possible. As InvestSMART's Chairman, Paul Clitheroe, often reminds investors: you can't control your returns, but you can control your costs.
We try to keep our investment costs down by investing in low-cost index funds and using a low-fee broker the few times we need to rebalance our portfolio.
Running an SMSF, however, comes with administration costs and takes time to manage. That's why we've been looking at how we can:
- Simplify our investments and reduce admin time
- Cut costs, including audit fees and ASIC charges
Our SMSF administrator uses BGL - a top SMSF admin software - to link my broking and cash accounts, saving time and avoiding duplicate data entry. The other two big software providers are Class and SuperConcepts.
Our annual bill is:
- Admin fee including audit: $3,250
- ASIC fee for corporate entity: $321
If I calculate those costs as a percentage of my assets, it's still lower than a public offer super fund like Colonial First State but still high enough to make a dent in my after-cost returns.
We also hold one unlisted managed fund and an investment in a PMA, which provides detailed tax reports at the end of the year.
We've been looking around for cheaper alternatives, and there's now a whole cottage industry of SMSF admin service providers. But I've found it really pays to check the fine print.
Some providers, like Esuperfund and Supermate, might look like good value based on their advertised price but they take a share of your interest and add a fee to cover broker commissions, which pushes the real cost higher.
Then there's Stake, a more recent entrant in this space. On the surface, its advertised $990 fee and low brokerage look attractive. But you have to transfer all your securities to its platform (which may mean paying transfer fees) and hold all your cash with its CMA provider, which pays no interest. Given the median SMSF cash balance is around $95,000, that's a hidden "cost" of around $2,850 a year based on a 3% interest rate.
What else is involved in running an SMSF and planning for the future?
Running an SMSF isn't just about the numbers - it's about time. Most of our time and effort goes into managing and reviewing our investments, alongside all the tax and compliance requirements. Some sources estimate that it takes about 100 hours a year - around two hours a week. For me, it's closer to one hour a week, probably because I don't make frequent changes to the portfolio.
If I was an active investor, and investing was a bigger part of my retirement strategy, I'd spend more time researching ideas and opportunities - but that would be a choice.
For active investors, investing through your SMSF can be far more tax efficient than investing outside super, assuming you are below the proposed $3 million cap (not yet legislated). Even if the cap does apply, there are still advantages for higher-rate taxpayers.
What happens when we can't manage the SMSF ourselves?
I mentioned in a previous diary entry that we might contribute money to our children's super to encourage them to set up their own SMSF. SMSFs can be run relatively cheaply, and around $250,000 is now considered the minimum balance to keep costs comparable with big super funds. The cost of running an SMSF is a topic I'll come back to in the future in more detail.
Another option we're considering is to bring them into our SMSF as we can have up to six members. This gives them the advantages of an SMSF without the time commitment. They can then look after it when we can't. This is something we've already started talking to them about, because it's important they know what's involved.
My top tips
- SMSFs aren't for everyone. They offer control but also come with responsibilities and fees. If you're thinking of setting one up, consider the costs and long-term commitment required.
- One of the key decisions to think about carefully is the structure - individual or corporate trustee are the main options.
- With an SMSF, you're responsible for the investment strategy now, but make sure you have a plan in place for when you can no longer do it.
- Consider using your SMSF, or setting one up for your children, to give them experience in managing their retirement finances.
- Shop around for the best deal on administration but beware of hidden fees. If your investments are straightforward, you should be able to keep the costs low.
What's next?
Following a recent webinar I hosted with Alan Kohler, Building wealth for retirement, I'll be looking at how we plan to deal with market volatility when we try to maximise our retirement income.
You can read entry 5 here.
Frequently Asked Questions about this Article…
The author set up an SMSF about 20 years ago after accountant advice that SMSFs can offer more flexibility and tax advantages. The article notes SMSFs can let you control investments and, in some situations, access tax perks (the author rolled over a small business sale gain without paying capital gains tax). In short, people choose SMSFs for greater control over investments and potential tax benefits, but those advantages come with extra responsibilities and costs.
ATO figures cited in the article show median management and administration costs around $3,166 a year and a median auditor fee of $550 (averages are $4,861 and $641 respectively). The author’s SMSF annual bill was listed as $3,250 for admin including audit plus an ASIC corporate entity fee of $321. These figures exclude investment expenses, insurance premiums, interest on borrowings and other incidental costs.
The author keeps costs down by simplifying investments, using low-cost index funds and a low-fee broker for occasional rebalancing. They also recommend shopping around for administration deals but carefully checking the fine print for hidden fees. If investments are straightforward, costs should be easier to manage.
The article warns that some providers advertised as cheap can have hidden charges. For example, Esuperfund and Supermate may take a share of interest and add fees to cover broker commissions. Stake advertises a low fee but requires transferring securities to its platform (possible transfer fees) and holding cash in a CMA that pays no interest — the article estimates a hidden cash interest cost of about $2,850 a year for a median SMSF cash balance of $95,000 at a 3% rate.
The author’s SMSF administrator uses BGL to link broking and cash accounts, saving time and avoiding duplicate data entry. The article also names Class and SuperConcepts as other major SMSF software providers. Good software can reduce admin time and errors by automating reporting and account linking.
Sources in the article estimate running an SMSF can take about 100 hours a year (roughly two hours a week). The author reports spending closer to one hour a week because they make few changes to the portfolio. The time commitment rises if you’re an active investor, since more research and trading increases administrative and compliance work.
The article recommends having a clear succession plan. Options discussed include contributing to a child’s super to encourage them to set up their own SMSF or adding your children as members of your SMSF (funds can have up to six members) so they can take over when you can’t manage it. The key is to communicate and document responsibilities so successors understand what’s involved.
The article suggests around $250,000 is now considered a minimum balance to keep SMSF running costs comparable with large public offer super funds. It also notes SMSFs can be more tax efficient for active investors compared with investing outside super — particularly for those below the proposed (but not yet legislated) $3 million cap — and may still offer advantages for higher-rate taxpayers.
Call 1300 880 160
Start a chat
Schedule a call
