Choosing the Right Super Option for Your Unique Needs
Self-managed super funds (SMSFs) are growing in popularity and more Australians are using them to build their retirement funds. But what are SMSFs and, most importantly, are they worth it? We provide you a comparison between the two most popular options, self-managed and APRA-regulated funds, to help bring you up to speed.
What is a self-managed super fund?
A SMSF is simply a superannuation fund that meets two set criteria.
First, SMSFs can only have four members or fewer, whereas large industry super funds have hundreds of thousands of members.
The decision-makers, called trustees or directors, are members of the self-managed super fund. As a simple analogy: consider the SMSF as a sole trader or small business, where the manager (decision-maker) is also an employee of the business. The ATO regulates SMSFs and requires regular reporting, the same as any other taxpaying entity.
What is an APRA regulated super fund?
An, Australian Prudential Regulation Authority (APRA)-regulated fund is another type of superannuation fund.
Most Australian taxpayers have their superannuation invested in APRA-regulated funds.
These include industry super funds, corporate super funds and company super funds. They are large funds with many thousands or even millions of members, and professional teams that run the super fund like any other large organisation.
Advantages of self-managed super funds
The biggest advantage of a SMSF is the investment control it gives its members. On the other hand, professionals direct large superannuation fund and members are less involved in specific investment decisions.
Large superannuation funds manage millions or billions of dollars of assets. The sheer amount of money they manage limits them to large, publicly tradeable assets, such as Australian and international shares, fixed interest (bonds) and large property assets like office towers and commercial real estate. SMSFs can invest in these as well, but they are also able to spread their investment allocation to small property holdings.
This flexibility and control also means that self-managed super funds can sometimes move faster than their APRA-regulated counterparts when market conditions change.
Property as an Investment
Many retirement savers with a SMSF also appreciate the ability to hold property interests inside their superannuation savings.
But there are some disadvantages of self-managed super funds too…
It’s also important to understand the challenges an SMSF might bring.
Staying on top of regulatory rules and obligations can be a challenge. Every year the rules change slightly. You (or your advisors) will need to stay on top of the changes to ensure you are not breaking the law. On the flipside, APRA-regulated funds have many employees. They are therefore, usually in a much better position to adjust investments should superannuation rules change.
From a member perspective, self-managed super funds can also be costly and time-consuming. In fact, 38% people that participated in a 2018 Australian Securities and Investments Commission (ASIC) study stated that running and managing their SMSF was a bigger time investment than they had originally planned for. Much of that time was spent not on investment decisions, but on administration and legal compliance.
Financial and legal costs
32% of respondents in the ASIC study reported that the set-up costs and ongoing administration fees were more than they had budgeted for. A further 29% were under the mistaken belief they were entitled to legal protections and compensation for fraud and theft involving their SMSF.
Self-managed super fund performance statistics and data
Ok, so SMSFs and APRA-regulated funds have plenty of positives and negatives, but what about their performance?
As of late 2018, there were just under 600,000 SMSFs, representing 1.125 million Australians.
There’s only five full years of data on which to judge SMSFs, but it doesn’t make for overly positive reading. In all but one of the years, APRA-regulated superannuation funds outperformed SMSFs – and quite substantially, with the average APRA-regulated fund performing 10% and 30% (in relative terms) better. In the single year where SMSFs won, the difference was negligible.
The Self-managed super fund takeaway
Self-managed super funds can offer control, flexibility and sometimes greater choice. However, the statistics also suggest that, on average, they under perform against APRA-regulated funds and can be more costly and time-consuming than anticipated.
That doesn’t mean that a SMSF is a bad choice for you as everyone’s circumstances are different. Therefore, it’s important to seek detailed financial advice relevant to your personal circumstances.
Please note: The information on this page is general in nature and should not be relied upon as detailed advice. Each situation is different and we recommend you seek the advice of a licensed financial planner and or/tax agent who can assess your unique circumstances and provide you with detailed advice as to the best superannuation option for you.