How Much Do You Need To Start A DIY Fund

You can start a DIY fund for a lot less than the finance industry would have you believe, says Barbara Smith

By Barbara Smith ·
5 Aug 2005

KEY POINTS

It isn't true you need $200,000 to set up a DIY fund, as ASIC says
Starting with a very small amount as a trial is a good idea
If you're smart funds can be run very cheaply

Nearly everyone involved in super has an opinion about how much is needed to start a self-managed superannuation fund (SMSF). Unfortunately, they all differ. In an ASIC media release in May (05-127), Jeremy Cooper said: “Below around a $200,000 fund balance, it is generally accepted that an SMSF is not cost-competitive with other available options for superannuation savings.” He went on to say that some people are willing to accept this because they prefer making their own decisions, and he stressed that advisers should ensure they are not misleading clients into thinking an SMSF will always put them ahead on costs.

I have said that about $100,000, or near that amount, is a suitable starting point, but now I believe there is not a single right amount as a minimum. Two things I am sure of is that "How much?" is just one consideration; and that a minimum $200,000 is far too high for people in the accumulation phase. In reality, most people start with much less than that. For example, a couple who have paid off their mortgage and no longer have to pay for their children's education costs, may have relatively little super, say $50,000. If they are now able to substantially increase their super contributions, perhaps say by as much as $50,000 a year, I would consider an SMSF as one of their options.

I recently came upon a case of a person who insisted on setting up a DIY fund with a very low amount. He said he wanted a trial run for a year to see how it worked before rolling over a fairly substantial amount from another fund. He is now happy with what he is doing and plans to do the rollover when he retires early next year.

Obviously, funds with a low asset value, because of administration costs, have less potential to generate returns. Even $200,000 may not be enough to start a fund for a couple who are about to retire and want to commence two pensions immediately. Recently, after examining the situation of a couple who were retiring with about $100,000 each in super, I advised them against setting up an SMSF.

Among issues I look at when considering an SMSF:

Even if an adviser were to advise against setting up a fund under a specific amount, there is nothing to stop anyone setting up by themselves by buying a deed off the internet. And there is nothing to compel that person to transfer money into a self-managed super fund once it is set up. It is their retirement money and they can make their own decisions.

Under the Financial Services Reform Act, tax agents or accountants can help set up an SMS but, unless they are also licensed advisers, they must not advise on which super fund best suits you or on what investments should be in your fund.