How much does it really cost to run an SMSF?
An SMSF typical costs about $1,800 a year to run. But the price can be as low $550 and a premium service can exceed $5,000,”
The cost to run a self-managed super fund (SMSF) is an important consideration for trustees. The fees and charges associated with the fund over time reduce its returns. So it’s important to get the balance right between paying for a quality service and ensuring the fund’s costs don’t erode returns too much.
“An SMSF typical costs about $1,800 a year to run. But the price can be as low $550 and a premium service can exceed $5,000,” says AMP financial planner Mark Borg.
There are three basic costs all SMSFs must be able to fund: the cost to set up the structure, the ongoing administration of the fund and portfolio administration costs.
Some SMSF investors will also seek financial advice around their fund, the cost of which will also need to be taken into account by fund members.
The cost to set-up your fund will include a number of components including costs for preparing the fund’s trust deed, the cost to establishing a company if the fund is using a corporate trustee structure and the cost to register the fund. According to Borg, it’s possible to set up an SMSF for as little as $1,000.
“Having a corporate trustee may add an additional $1,000 to this amount. There are many operators in the market, but care should be taken with cut-price options available. In particular with lower cost operators, it’s essential to ensure the trust deed is compliant” he adds.
Ongoing running costs
While set-up costs are generally one-off, ongoing costs will be accrued by the fund on a continual basis. It’s these fees in particular trustees should keep a close watch over, as they have the potential to reduce returns over time. Ongoing costs include fees related to compliance, general administration and audit.
“Running costs can range from the very minimal, which is less than $500, to more than $6,000,” Borg notes.
The upper end of the scale includes activities such as record keeping, ensuring that your trust deed is maintained and receiving up-to-date and ongoing advice, especially around regulatory changes.
Some trustees have sought financial advice recently to ensure their fund complies with the raft of regulatory changes introduced on 1 July this year, including the new $1.6 million transfer balance cap.
Many fund administrators bundle the cost of certain ongoing services such as general admin and compliance together. But trustees must be sure to understand exactly what they are paying for before singing up with an administrator.
“When services are wrapped together care should be taken to make sure you understand just what is included. Also pay attention when administration is outsourced to ensure that records and data continue to be kept securely,” says Borg.
There are also many steps trustees can take to ensure they are minimising costs as much as possible, without compromising the quality of the way the fund is run.
“Poor record keeping accounts for most cost blow outs. So keeping you fund’s records clean and working with an administration firm that can access your electronic records will minimise the need to conduct research to keep your records up-to-date,” he adds.
In fact, Borg says in his experience poor record keeping is the biggest mistake he sees trustees make and making record keeping errors can be incredibly costly.
Says Borg: “This requires the administrators to conduct substantial research to understand just what has gone on, which takes time and costs money.”
Aside from great record keeping, another way to keep costs down is to always try to ensure that the fund’s records and transactions can be electronically accessed.
“The electronic exchange of a fund’s data is efficient and efficiency means the fund is more cost-effective. I also warn clients to be very cautious with any cut price SMSF offering.
“Ensuring that the fund’s information is secure and that the SMSF remains compliant is essential as ultimately, the trustee is responsible for the fund and not the administrator,” Borg warns.
Choosing the right administrator from the start is essential as once the fund is set up, it is time consuming and costly to switch providers.
The idea is to do due diligence on a number of administrators, compare their cost and service offering, talk to other SMSF trustees about their experience with their administrator and make a fully informed decision on that basis.