How much money do you need to set up a self managed super fund?
September 26, 2010

How much money do you need to set up a self managed super fund?

By Kris Kitto


One common question in regards to the establishment of a SMSF is ‘How much money do you need to set up a self managed super fund?’

The answer is simple: It depends!

If you read the information out there regarding this subject, you will find that the recommended minimum amount required for establishing a SMSF is $200,000.  This figure is based on one thing – the cost of operating an SMSF when compared to the management and administration fees charged by retail and industry superannuation funds.

Sounds good in theory.  On average a retail superannuation fund will charge 1.37% of your balance in administration and investment management costs – so if you have a $200,000 in a SMSF, your annual accounts, audit and administration fees are expected to be $2,740 – which is pretty reasonable.

However, this theory has a major flaw when trying to answer the question: How much money do you need to set up a self managed super fund?.  A SMSF is nothing like an industry or retail superannuation fund.  A SMSF gives you total control and freedom of choice regarding your investments, offers flexibility and you are able to utilise advanced wealth building strategies that are simply not available to the average industry or retail super fund member.

Comparing the operating cost of an SMSF to an industry or retail super fund is like comparing the cost of servicing a Porsche to the cost of servicing a 2004 Toyota Camry.  A SMSF should cost you more per annum when compared to other types of super funds – this is the premium you pay for having a superior vehicle to build your wealth.

That said there is no reason to unnecessarily pay exorbitant amounts in administration costs.   The more you can save when you first start your fund, the more you will have to invest and grow your wealth!

Another consideration when determining how much is enough to start an SMSF is the ability to diversify.  Diversification is basically the splitting up of your investment monies over different asset ‘classes’ such as cash, Australian Shares, International Shares, Fixed Interest, Property etc.

The more money you have to invest, the easier it is to spread your monies over the different asset classes and in theory your returns will be more stable and consistent in terms of income and capital growth.

With a smaller amount of funds, you may be able to achieve diversification through investing via a managed fund; however this simply adds another layer of fees – meaning you may as well have left your money in an industry or retail fund. This brings me to my next point – quality.

The quality of your investments is the key.  Someone who investments $100,000 in high quality investments under a well considered and consistent investment strategy over the long run is going to better than someone who investments more money in poor quality investments or who chops and changes their investment strategy every year or so.

Through my employment as an accountant, I have seen hundreds of sets of SMSF accounts. All the SMSFs that have performed well over a long period of time have one thing in common – they have high quality investments and they stick with them.  It is not a matter of picking a specific asset class – such as Australian shares over property – it really does come down to the QUALITY of the individual investments.

How much money do you need to set up a self managed super fund?

Firstly you need to ask yourself if you are planning to buy high quality investments or are you just going to jump on the bandwagon of the person promoting the latest investment scheme and throw your superannuation savings at it?

Secondly you need to know how much you need to invest to obtain those high quality investments.  For example if you are going to buy a cash flow positive property using an SMSF limited recourse loan, how much do you need to cover a large enough deposit and the associated purchase and set up costs?

Thirdly you need to know how much it is going to cost you per year to run your fund.  Be realistic, work out how much as a percentage of your total superannuation savings will be eaten up every year, and if this percentage is acceptable to you in regards to what you are getting into return.

Once you can answer the above three questions you will have a really good idea of exactly how much you will need to be able to commence your own SMSF.

So what if you work out that you are a little, or a long way short of what you need to start your own SMSF?  Here are some tips they may get you their sooner:

  1. Read my article about how to boost you super balance here.
  2. You can have up to 4 members in an SMSF – is there someone else such as a parent who can chip in a small amount to get you started?  The ownership of the money will still remain with them within the SMSF, and because they are older, they may enable the profits on the pooled SMSF investments to be legitimately accessed at their retirement – which will be significantly earlier than your retirement.
  3. Re-evaluate your investment strategy – for example if you want to buy a cash flow positive property within your SMSF – can you find one that is slightly cheaper but still has a solid yield and great capital growth potential?
  4. Can you reduce your administration costs to make having a SMSF more cost effective?  This doesn’t mean trying to cut corners and make it cheap – it simply means working with your accountant / SMSF administrator to make the annual administration process more streamlined to give you better value for money.

So what is my opinion in regards to how much you need to set up a SMSF?

If I had to pick a minimum amount, I would say at least $120,000 combined.

I will however add a caveat on this opinion – it is based on a relatively uncomplicated investment strategy involving a mix of direct shares, cash and managed funds, and that the trustees keep very good and ‘clean’ records.

The more complicated your investments, or the more frequently you invest / trade and the amount of time you are willing to put in to maintain your own SMSF records will all influence your annual  administration costs.

If you have any questions please feel free to comment below.

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