Strategy, Superannuation

Fund balance questions overlook pooling advantage

Small wooden figures illustrating a pool of people and fund balances in an SMSF

Questions around member balances in SMSFs need to consider their use of multiple members which can boost the bottom line.

Questions about the appropriate level of funds required to establish an SMSF need to consider the total balances of all members within a fund, according to Class Super, which has claimed the average fund balance at establishment is over $400,000.

In its March 2019 “SMSF Benchmark Report”, Class said while there had been debate about the level of funds needed to make the establishment of an SMSF viable, the funds were able to take advantage of their multi-member status to boost total fund size.

“There has been considerable debate and analysis in recent times around how much money is needed to make establishing an SMSF a viable proposition, taking into account set-up and ongoing costs against likely investment returns,” the SMSF administration software provider said.

“While many agree there’s no clear-cut answer, and applying a hard minimum balance isn’t necessarily helpful or appropriate, one clear advantage of an SMSF is the ability for individuals in a multi-member fund to pool their investment dollars and give fund members more ‘investment clout’.”

The report pointed out an average individual member balance of a newly established fund was around $225,000, but the average fund balance was around $406,000.

Class pointed out while it is often assumed SMSFs are set up as single-member funds, and new members were added later, “72 per cent of SMSFs were established as two-member funds, making it important to consider overall fund balance, not just individual member balances”.

The report, which drew on data from 26,100 funds with 46,943 members and which were newly established on Class from 2014 to 2018, also found the average age at which a person is setting up an SMSF has continued to remain under 50.

Class found the average establishment age for the newly established funds in its data set was 48.9 and had varied little over the past five years represented in the data sample.

These numbers are consistent with those released by the ATO on 3 May as part of its quarterly SMSF reports, which showed that for the March quarter 2019, 65.5 per cent of new SMSFs were established by people under 50. The figure increased to 79.8 per cent when including those aged 50 to 55. In contrast, the number of trustees under 50 represented 26.1 per cent of the total number of SMSF trustees, or about 295,000 of the 1.129 million members reported by the ATO.

“There is a continuing trend for members of new SMSFs to be from younger age groups. The most recent average member ages at establishment are all below the 2012 average age of approximately 50, published by the ATO,” Class said.

“One factor that may see this trend continue is the proposal to increase the Superannuation Guarantee from its current rate of 9.5 per cent by half a percentage point from July 2021, until it hits 12 per cent in 2025. This will enable the younger workforce to accumulate greater super balances at a younger age over time.”

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