Super accounts between 200k and 500k (grey area) have an important decision to make

The recent Costs of operating SMSFs 2020 report from the SMSF Association and Rice Warner was a comprehensive analysis of superannuation and SMSFs. The key takeout was something that many of us have known for a long time – that SMSFs of more than $500,000 were generally cheaper to run than APRA regulated funds.

The research also suggested that SMSFs could be competitive with APRA funds at around $200,000. So there now exists a grey area between $200k and $500k where some members will be better off with an SMSF and others an APRA regulated fund. This leads to the question, how is this group to know whether an SMSF or an APRA regulated fund will set them up in the best way possible for retirement?

The traditional wisdom is that an APRA regulated fund is most appropriate when it’s line ball. This would be a fair strategy if all super members were a homogenous group. But in the real world, this is not the case and there will be some for whom moving to an SMSF as soon as it’s “not too much more expensive” than an APRA regulated fund will be completely appropriate. There are others for whom an APRA regulated fund might remain the best choice.

For those with balances that fall into this grey area, there are four factors that we believe will help them to make an informed decision about which way to jump.

1)    Amount and frequency of contributions

For those members who are fast and furious, contributing as much as possible and growing quickly, getting into an SMSF as soon as possible is likely to make sense. This is just maths. Moving from an APRA fund to an SMSF costs money – there will be tax to pay (that will reduce their balance) when assets are sold to make the move. This can be significant if investments do well while the balance is building quickly. If an SMSF is going to become a better option in a year or two, starting an SMSF at a time that appears a little too early might well be cheaper in the long run if these costs can be avoided.

Conversely, someone in the superannuation grey zone who is approaching retirement is more likely to find that sticking with an APRA regulated fund is best for them. Balances eventually tend to go down in retirement as we use our superannuation for income to live on, making the SMSF less cost effective over time.

2)    Investment opportunities

All superannuation funds are subject to broadly the same investment rules but not all funds choose to take advantage of every opportunity available to them. It is difficult for an APRA fund to justify spending the time and money researching every possible investment whereas the trustee of an SMSF (or their adviser) can research just those with potential for their fund.

This means SMSFs often have opportunities that are not quirky or exotic but are nonetheless not available in APRA funds. These can range from investments commonly available to the public (for example, many large property funds are well supported by individual investors but are not available through their APRA superannuation fund) through to more unique opportunities such as Initial Public Offerings (IPOs) when new companies list on the stock exchange or property (including property bought with borrowed money to help grow an SMSF more quickly).

Those with less than $500k who plan to take advantage of some of these opportunities might well conclude that an SMSF makes sense for them.

3)    The level of interest and knowledge in managing their own superannuation

Generally, those who opt for an SMSF are attracted by the greater level of control an SMSF gives members, particularly when it comes to investments. But this does require expertise or paying for advice. If a member is confident finding the right advisers or making their own decisions it can pay off handsomely.

Conversely, someone who doesn’t feel confident here or doesn’t want to invest their time this way may be better served by an APRA regulated fund. 

In thinking this through it’s worth bearing in mind that for most of us, there is an element of “needs must” in the amount of attention we pay to anything that is not automatically interesting to us (and unfortunately financial matters often fall into this category).  Someone with $30,000 in super could perhaps justify largely ignoring how their balance is invested. On the other hand, someone with $300,000 that is rapidly growing is likely to be paying much more attention.  At that point, an SMSF often becomes inevitable – increased engagement driven by a larger balance prompts a desire to take more control.

4)    Residency and planned overseas trips are a consideration

There are strict rules all superannuation funds must follow to be “Australian” superannuation funds (ie, normal complying superannuation funds that get tax breaks). When it comes to an SMSF, these can be hard to meet if most of the members spend a lot of their time working overseas. 

In that case, it might be easier to build up an APRA fund nest egg while working overseas and look at an SMSF in the future once they have returned home.

There is no ‘one size fits all’ approach and different people will make different decisions. APRA regulated funds are the right solution for those who want a set and forget fund. Conversely, members who are seeking power, choice and control in choosing exactly how they manage their retirement savings may be better off jumping the other direction to an SMSF. One of the great benefits of an SMSF is that it evolves and changes as its members’ needs change – it really is a “fund for life”.  Often that means those falling in the grey area between $200k and $500k who fully expect to be over $500k one day should think about an SMSF sooner rather than later.

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