When it comes to super, it can be a hard choice between which fund you should go with, do you change funds, or should you start your own SMSF?
All these questions are hard to answer, that is why we have completed a comparison between SMSF and Retail super fund, to help assist you to make an informed decision, which is best suited to your individual circumstances.
First let us explain the difference between the two:
SMSF is a private super fund that you set up and manage yourself, you can choose your investments and the insurance. Your SMSF can have up to four members, who are friends or family. As a member, you are a trustee of the fund — or you can get a corporate trustee. In either case, you are responsible for the fund. While having control over your own super can be appealing, it’s a lot of work and comes with risk.
Retail super fund is a type of super fund offered by financial institutions such as banks and wealth management companies. For example, super funds offered by the big banks (ANZ, NAB, Commbank etc.) are retail super funds. These funds tend to have a wide range of investment options, and may have higher fees than other types of accounts, and importantly, the company that owns the fund has an incentive to generate a profit for its shareholders. Just like other superannuation funds, members of a retail super fund will have their money invested into different shares, stocks and investments. This is done by professional investment managers.
Self-managed super fund (SMSF)
- More investment control – You can establish your own investment strategy and directly control where and how your super is invested.
- More investment choice – You can select from a wider range of investments including all listed shares, some unlisted shares, residential and business property, and collectables such as artwork, stamps and coins.
- One fund for the family – You can set up a fund for yourself and up to three other people and consolidate your super balances. This could enable you to invest in assets of higher value than if you set up a fund with fewer members, achieve greater estate planning flexibility, and reduce fund costs.
- Borrow to make larger investments – Your SMSF could make a larger investment in assets such as shares and property by using cash in your fund and borrow the rest.
- Tax savings – With SMSFs you can take greater control over the timing of tax events such as starting a pension without triggering capital gains tax when your superannuation assets move into pension phase. You may also have the option of transferring certain assets that you own into your SMSF.
- Greater estate planning certainty and flexibility – You can nominate who you would like to receive your super when you pass away without having to meet some of the constraints that apply to other super funds.
While an SMSF can offer greater opportunities to take control of your retirement savings, there are some potential disadvantages you should also consider.
- Higher costs for lower balances – SMSFs generally only become cost-effective if the fund has $200,000 or more invested. This is particularly true where you outsource and pay for most or all the fund administration.
- Greater responsibility – When you set up an SMSF, you and any other fund members will generally need to be trustees (or directors of the corporate trustee) and will be responsible for meeting a range of legal and other obligations.
- Time consuming – You will need to have enough time, knowledge, and skills to manage your own super and meet your legal and other obligations.
SMSF might right for you if:
- You’ve got a legal background or good legal knowledge
- You’re very financially literate
- You’ve got a big super balance
- You are willing to invest significant amounts of time researching investment options and managing your fund
- You understand the costs associated with running an SMSF and can cover these costs
- You want complete control of your superannuation
Retail Super Fund
- Retail super funds are open to everyone
- Wide range of investment portfolios available
- Offer competitive return
- May give customers more in-depth control of investments
- They can offer members a range of insurances on their superannuation funds
- Companies may want to retain some of the profits, which could mean lower returns for you
- Self-managing can be less expensive for amounts over $200,000
Differences between SMSF and Retail funds?
- A SMSF can have a maximum of 4 (four) members, whereas retail funds generally don’t have a limit.
- Compliance risk is taken on by SMSF members, whereas compliance risk is borne by the professional licensed trustee for retail funds.
- Insurance is a choice and can be purchased for SMSF members, but it tends to be higher in cost than other super funds. For retail super funds, insurance is usually offered to cover to members that costs less, as large funds can get discounted premiums.
- SMSFs are regulated by the ATO, whereas retail funds are regulated by the Australian Prudential Regulation Authority (APRA).
- When it comes to disputes, SMSFs must use a dispute resolution process or the courts to resolve an issue, whereas retail super fund members have access to the Australian Financial Complaints Authority (AFCA).
- If there is fraudulent conduct or theft, no government financial assistance is available to SMSFs however members may have legal options under Corporations Law. For retail fund members, members may be eligible for government financial assistance in the event of fraud or theft.
Who gives you better returns?
This will depend ultimately on each fund itself, and past returns are no guaranteed for future returns. For example, an SMSF may perform badly one year and could still outperform another super fund that performed well in another year. In the graph below, it shows from 2013 to 2018, SMSF outperformed regular super funds in 2016-17 when they, on average, achieved growth of 10.2% compared to 9.1% for super funds.
The table below compares the average returns for SMSFs with APRA-regulated super funds over a five-year period. On average, APRA-regulated super funds achieved higher returns than SMSFs.
Overall SMSF can be quite expensive to run, According to ATO statistic overview of SMSF’s in 2017/2018, the average cost of running an a SMSF was $14,879. The cost can include establishment/upfront costs, ongoing/operating costs and investment management costs.
Although, a super fund average fees tend to be much cheaper, according to 2019 Rainmaker report on super fees stated that on average charges are $2,400 per year. Super fund members in Australia are now paying 1.1% in fees on average, down from the 1.2% they paid in 2018. Of the 1.1% paid in average fees by members, 0.7% is accounted for investment fees, while the remaining 0.4% is accounted for administration and product-related fees.
Which is for right me?
That is not an easy question to answer, as there isn’t a ‘one size fits all’ super fund to suit everyone.
It’s vital that you take the time to research funds or alternatively speak to financial advisor regarding your circumstances and they will assist you in the process and discuss your exact needs.