I started my SMSF 20 years ago with about $30,000 when I left my first job. It had four stocks, two of which immediately dropped in value. The remaining two stayed roughly the same during the next four years before I added to the capital when I left my second job. (By then, I’d learned my lesson – I got advice and have done so ever since.)
So why did someone who knew nothing about SMSFs, had limited interest in investment markets and – most importantly – had such a small balance make the decision to start a self-managed fund?
While the common response today seems to be to take a cheap shot at accountants and blame them for all those funds with small balances, that was certainly not the case for me. I researched the options and made a conscious decision to start one despite the fact that it clearly wasn’t the cheapest or safest approach at the time.
Why?
What prompted me to start mine is probably similar to the drivers for many others with small balances. I started my working life at the beginning of the compulsory super regime. If the government was going to force me to save in superannuation, I was jolly well going to control it. While managing my own super wasn’t right at the top of my bucket list at the time, my attitude was “start as you mean to go on”. I figured I would make my mistakes early and ensure I was well equipped to make the best use out of my SMSF by the time it had a decent amount of money in it.
I also knew that moving into an SMSF down the track would be expensive. If I waited too long, there would be capital gains tax and potentially other costs to move my money when the time came. Or if I continued with my atrocious stock picking record I would have capital losses that I wouldn’t be able to take with me. Would those future benefits outweigh the costs of running my SMSF with such a small balance in the interim? Possibly not, but it was a risk I was willing to take.
And finally, I wasn’t really sure what support I was going to want long term. Would I want a financial adviser? If I changed my mind and moved advisers, would that mean a change in fund all over again? While I’d not really thought of the phrase “platform for life” back then, it’s what I knew I wanted.
Over time I discovered all sorts of add-on benefits to having an SMSF. When contribution splitting was first introduced, I was into it straight away. My husband will reach preservation age 10 years earlier than I will; it seemed like a no-brainer to start skewing our super to his account. Almost by chance I discovered that the fund to which I’d previously belonged wasn’t ready to offer it yet. I’d left a small balance there to keep my insurance but I was glad I had an alternative home for my contributions.
It took me years to creep above $100,000, at which point it finally became cost-effective.
So to all those critical of trustees with small balances and dubious about those who may have advised them, remember that a fund with a small balance is sometimes a transitory state. It’s also a very sane response to a legislative environment in which someone with $30,000 today will be forced to grow their superannuation for the next 40 years.
It’s why prescribing minimum balances or setting tests for trustees will never be appropriate for SMSFs and the government should stay well away from that.
In fact for me, just like the Remington electric shaver advertisement of my youth “I liked it so much I bought [or in my case, started] the company”.
Meg Heffron will be speaking at the 8th Annual SMSF Adviser Strategy Day in October. With only three weeks to go, tickets are selling fast. Click here to secure your place!
Tim and Leo,
You are getting hung up on cost = value. This is incorrect. The definition of value is not a purely quantitative calculation, there are qualitative factors at play. These factors often cannot have a “number’ placed on them.
Not only that you are forgetting that risk insurance in an industry fund can be very problematic and/or inflexible amongst the many potential disadvantages that these industry funds have.
The nanny state mentality and the unwillingness of some in our society to let people be responsible for themselves is very disappointing.
The industry based faux SMSF options for industry funds might meet some of the qualitative factors for certain people and as they are likely cheaper the “value” function may be highest for them.
The idea that there is ONLY one solution out there for any problem has limited cognitive substance.
PS George I hope I haven’t offended your punctuation pernicketyness.
If people want to pick their own stocks and so on, some industry funds will let you do this – with total admin costs of $280 per annum. Much cheaper than any SMSF.
Leo only those who cant think for themselves would fall into the traps you suggest. We are not all accountants but we know the rules quite well. I bet you cant play chess either.
Say $2,000 annual fees on a $40,000 balance equates to 5% fees per annum. Fees would be less for an Accountant doing their own administration, but the stock picking speculation would be no better. I fear some of the positive responses may be tainted by their perspective as an Accountant.
People ‘want control over their own destiny’, but then want to fall back on the Age Pension when their share market speculation doesn’t pay off.
I am afraid that Gareth Hall’s comments may be somewhat tainted with a financial advisor’s perspective. The whole point about a self managed fund is that it is “self managed” and it doesn’t need a financial advisor!!! What part of “self managed” is hard to understand? It may be true that a person is “backing him or herself” but the clear message is that people want control over their destiny.
Gareth Hall appears to be ignorant of the ongoing success enjoyed by people running their own SMSF
Good on you for taking an active interest in your super. I don’t think your decision was necessarily the best financial decision but at least you took action.
My concern as a financial adviser is that many people seem to be making the decision to run a SMSF without understanding the alternatives which may well give them a better outcome, as a result of lower running costs, etc. They also can make poor investment decisions and end up with assets that are not diversified. DIY is often just too appealing to many Australians when research and common sense would suggest there are better alternatives. It is probably best to seek advice upfront rather than learn from mistakes!
Well said Meg. What a fantastic article!!
An SMSF is an excellent training ground and is encouraging people to learn how to control their own finances.
[quote name=”Shaun C”]I am all for people taking ownership of their financial affairs, I actively encourage it dailyas a Financial Planner. I am however concerned that tyou seem to be elling people to go out and start an SMSF with extremely low starting balances. Many master trust can give their members fund, choices and share options…[/quote]
I take your point Shaun – certainly someone else in exactly the same position as me might make a different decision for very good reasons. My key point really was that at the time I was a fairly uninformed 25 year old who used this as a trigger to get informed. In fact, I didn’t even think of it as “saving for retirement” because that seemed so far away. I thought of it as “taking control of my compulsory saving”. Far from being disenfranchised by regulation, I was empowered by it. You can bet I wouldn’t have been saving 5% of salary back then if I hadn’t had to!
I have read the replies to this article and I am appalled by the abysmal spelling in some of the responses. Items like “cant” instead of “can’t” “its” instead of “it’s” and many others. If we are so careless and sloppy with our communication how can we expect people to take us seriously.
I am all for people taking ownership of their financial affairs, I actively encourage it dailyas a Financial Planner. I am however concerned that tyou seem to be elling people to go out and start an SMSF with extremely low starting balances. Many master trust can give their members fund, choices and share options with beneficial ownership as well as contribution splitting and other benefits. This can allow you to move seamlessly to an SMSF when the time is right and start to learn about building your super fund while keeping the training wheels on. Maybe im reading this article wrong but this seems to be encouraging people to gamble with thier life savings. I know sometimes the goverment telling us what we can and cant do is annoying, but much of the time, its for a good reason.
We started our SMSF in 2004 to control our money with only about $15-20k. For cheaper insurance premiums we left a minimal balance with our managed account. That was fortunate as I damaged my ankle badly and went through a rough trot.
After about 6 years of mainly pain, with stocks, we came across a tiny commercial property in 2011 that I was helping the agent prepare for sale. We made an offer of $75k and had purchased within 24 hours of both seeing it. We topped up our SMSF to purchase. If we didn’t have the fund we would have missed it. It was a retirement changing event. We get $250-270 a week now, never been untenanted and it was revalued each year by the valuer. Latest valuation came in at $155k June 2014. We save the rental and my wife’s contributions and pay as many of the strata and water etc with spare cash. We are planning on using the growing balance as a deposit for a small 2nd property in the next 2 years.
I think you once said Meg, “A SMSF is a vehicle for life”. How true.
At last some positive comments from someone who knows what she is talking about….well done Meg,keep up the good work !
Fantastically refreshing article Meg – great to hear your personal story. I think many trustees feel the same as you, they do not want to be dictated to my governments when it comes to controlling their money… any more than usual anyway.
We need more people paying attention to their financial literacy at a younger age, like you say, “start as you mean to go on”.
A brave voice in the wilderness. Well done Meg: all power to you. Amen and hallelujah. George Lawrence. Chartered Accountant.
Hear, hear Meg. I’m in the same position. My husband & I started our SMSF with just $42K. In late 2007. Doh. This last financial year is the first time our balances have crept over our starting balance even with our contributions. But we are happy with our decision. We are both 34 so we have plenty of time to increase the balance. It actually is cost effective for us as I’m an administrator so I do majority of the work myself, and we have control of our investments.
Also, it’s not a ‘one size fits all’. Trustees who need to outsource everything would need a bigger balance to be viable than those who are able and willing to do everything themselves.
Meg
You have perfectly expressed the motivation of people who set up an SMSF even though it will, for a time, have a low balance and may not be cost efficient. If people have the desire to manage their own financial affairs and the determination to keep saving they will grow their fund to the point where it is more economical than a managed fund. The sense of achievement and satisfaction in securing your own financial independence is immeasurable. Exercising the choice to do it on your own makes for a more self-reliant and resilient society. These are values that transcend dollar costs.
Duncan Fairweather, SMSF Owners’ Alliance.