SMSF vs Industry Super Fund: Which Suits Your Situation?
Choosing between a Self-Managed Super Fund (SMSF) and an industry super fund is an important decision. Both are designed to help you build wealth for retirement, but they operate very differently.
An industry super fund offers professional investment management and takes care of most administration. An SMSF gives you greater control over your investments, but also makes you responsible for managing the fund and meeting its legal obligations.
So which option is right for you?
The answer depends on how much control you want, your investment objectives, the size of your super balance and how actively you want to be involved.
What is an industry super fund?
An industry super fund is a professionally managed superannuation fund. Although many originally served particular industries, most are now open to the general public.
When you contribute to an industry fund, the fund's professional investment managers look after the investment portfolio. You can generally choose from a range of investment options, such as balanced, growth, conservative or international shares.
The fund also manages administration, reporting and regulatory compliance.
Advantages include:
Professional investment management.
Relatively straightforward administration.
A range of investment options.
Insurance cover may be available through the fund.
Fees can benefit from economies of scale.
For people who want their super managed without becoming involved in the day-to-day decisions, an industry fund can be a convenient option.
The main limitation is that your investment choices are generally restricted to the options offered by the fund. You usually cannot select and manage individual assets in the same way as an SMSF trustee.
What is a Self-Managed Super Fund?
A Self-Managed Super Fund is a private superannuation fund established and managed by its members, who are also its trustees or directors of a corporate trustee.
An SMSF can have up to six members. The trustees are responsible for managing the fund, making investment decisions and ensuring it complies with superannuation and tax legislation.
Unlike an industry fund, you decide how the fund invests its money, subject to the superannuation rules.
Depending on the fund's investment strategy, an SMSF may invest in:
Australian and international shares.
Exchange-traded funds (ETFs).
Commercial or residential property, subject to strict rules.
Cash and term deposits.
Other permitted investments.
The attraction is greater flexibility and control. However, that control comes with additional responsibilities.
Advantages include:
Greater control over investment decisions.
Flexibility to develop an investment strategy around your retirement objectives.
Potential to hold assets that may not be available through a traditional super fund.
Greater involvement in managing your retirement savings.
Opportunities for certain business owners to hold eligible commercial property within super.
The trade-off is that trustees remain legally responsible for the fund, even when they engage accountants, administrators or other professionals to help.
SMSF vs industry super fund: the key differences
Feature | SMSF | Industry super fund |
|---|---|---|
Investment control | Trustees make investment decisions | Choose from available options |
Administration | Managed by trustees and professionals engaged by them | Managed by the fund |
Regulation | Australian Taxation Office (ATO) | APRA |
Compliance responsibility | Trustees | Professional trustee |
Investment choice | Broad, subject to super laws | Options offered by the fund |
Insurance | Trustees must consider members' insurance needs | Often available through the fund |
Annual audit | Independent audit required | Managed by the fund |
Costs | Set-up and ongoing operating costs | Fund administration and investment fees |
Time commitment | Significant | Generally minimal |
Neither structure is automatically better. The important question is which arrangement is more appropriate for your circumstances.
Which option is cheaper?
Cost is one of the most important considerations when comparing an SMSF with an industry fund.
Industry funds can benefit from economies of scale. Their administration and investment costs are spread across a large membership base, and many offer relatively low-cost investment options.
An SMSF has a different cost structure. Expenses can include:
Accounting and tax return preparation.
Independent annual audit.
ATO supervisory levy.
Investment administration and brokerage.
Legal and financial advice.
Corporate trustee establishment and annual ASIC fees, where applicable.
Many of these costs are fixed rather than directly linked to the fund's balance.
This means the cost of operating an SMSF can represent a much larger percentage of a smaller super balance.
However, there is no universal super balance at which an SMSF automatically becomes worthwhile. The decision should consider the actual costs, investment strategy, expected benefits and level of involvement required.
Investment control: the biggest difference
For many people, investment control is the main reason for considering an SMSF.
With an industry fund, you generally select an investment option designed and managed by the fund. Some industry funds also provide more extensive member-directed investment choices.
With an SMSF, trustees have direct responsibility for selecting and managing investments.
This can be attractive if you have a clear investment strategy or want to hold particular assets within superannuation.
For example, a business owner may want their SMSF to purchase eligible commercial property and lease it to their business. This can be possible where the relevant superannuation rules are satisfied, including the requirements applying to business real property and related-party leases.
However, investment flexibility does not mean there are no restrictions. SMSF investments must comply with superannuation legislation, including the sole purpose test and related-party rules.
Greater control also means greater responsibility for investment performance and risk.
What about insurance?
Insurance is an important consideration when comparing the two structures.
Many industry super funds offer members access to life insurance, total and permanent disability (TPD) insurance and income protection cover.
Group insurance arrangements can sometimes provide cost advantages, although cover, premiums, exclusions and eligibility vary.
With an SMSF, trustees must consider whether the fund should hold insurance for its members. Existing insurance held through an industry fund may be lost when super is transferred.
Before moving your super, check what insurance you currently have, whether it can be retained and whether replacement cover is available.
Do not assume you can obtain equivalent cover at the same price.
Who is an SMSF best suited to?
An SMSF may suit people who:
Want greater control over their super investments.
Have a clear investment strategy.
Have sufficient funds to make the operating costs reasonable.
Have the time and ability to understand trustee responsibilities.
Want to consider investments such as eligible business property.
Are comfortable obtaining professional assistance and managing ongoing compliance.
An industry fund may be more appropriate if you:
Prefer professional investment management.
Want minimal administration.
Are happy choosing from the fund's investment options.
Value the convenience of insurance arrangements.
Do not want personal responsibility for running a super fund.
It is also worth remembering that an SMSF is not necessarily a better investment simply because you have more control. Investment performance depends on the assets selected, their costs and the strategy followed.
What happens if you get SMSF compliance wrong?
This is an important consideration that is sometimes overlooked when people focus on investment opportunities.
SMSF trustees have legal obligations under superannuation and tax legislation. These include maintaining an investment strategy, keeping proper records, arranging an annual independent audit and lodging the fund's annual return.
The ATO can take compliance action where trustees breach the rules. Depending on the circumstances, penalties can apply personally to trustees or directors of a corporate trustee.
Using an accountant or SMSF administrator does not remove the trustees' legal responsibility.
This is why professional SMSF compliance support is important. Keeping the fund properly documented and meeting its reporting obligations helps trustees avoid unnecessary problems.
Can you move from an industry fund to an SMSF?
Yes, but it is important to understand the implications before transferring your super.
You should consider:
Any insurance cover you may lose.
Exit or transaction costs.
Investment holdings that may need to be sold.
The cost of establishing and operating an SMSF.
Whether the proposed investment strategy is suitable.
Your ongoing trustee responsibilities.
You should also consider whether your objectives could be achieved through investment choice within your existing industry fund.
A registered financial adviser can help assess whether establishing an SMSF is appropriate for your circumstances.
Frequently asked questions
Is an SMSF better than an industry super fund?
Not necessarily. An SMSF provides greater investment control but comes with additional costs, administration and legal responsibilities. An industry fund offers convenience and professional management. The better option depends on your circumstances and objectives.
How much super do I need to start an SMSF?
There is no single balance that guarantees an SMSF is worthwhile. You should consider the fund's establishment and annual costs, investment strategy, expected contributions and the benefits you expect to receive.
Can an SMSF invest in property?
Yes. SMSFs can invest in certain residential and commercial properties, provided the investment complies with superannuation law. Related-party restrictions and the sole purpose test are particularly important.
Can I have both an SMSF and an industry super account?
Yes. You may hold more than one superannuation account, subject to the applicable rules. However, maintaining multiple accounts can increase fees and administration, so consider whether there is a genuine benefit.
Making the right superannuation decision
Choosing between an SMSF and an industry super fund is about more than investment returns or fees.
An industry fund may provide everything you need if you want professional management and minimal involvement. An SMSF may offer advantages if you want greater investment control, have a suitable strategy and are prepared to accept the responsibilities involved.
The important thing is to understand the costs, benefits and obligations before making the decision.
At Guidance Accounting, we help SMSF trustees with the accounting, tax and compliance requirements involved in running a self-managed super fund.
If you are considering establishing an SMSF or want to review your existing fund's structure and compliance position, contact Guidance Accounting to discuss your requirements.
Disclaimer: This article provides general information only and should not be relied upon as financial, taxation or legal advice. Establishing or winding up an SMSF is a significant decision. Consider obtaining advice from appropriately qualified professionals before making changes to your superannuation arrangements.