The self-managed superannuation fund (SMSF) sector has experienced extraordinary growth over the last 15 years now accounting for almost $600 billion of superannuation, overtaking the retail superannuation sector now worth about $550 billion.
Most individuals cite the desire for investment control and reduction of fees as their driver for establishing an SMSF. There is no question that a SMSF offers the widest range of investment options and control, however the cost-effectiveness of a SMSF is highly dependent on the level of funds held and how much of the trustee responsibilities can be handled by the individuals rather than outsourcing to SMSF professionals. SMSFs can be complex to run, and require a high level of financial literacy, not to mention time available to tend to the SMSF obligations.
This has driven the rapid growth in “super wraps”, which offer some of the appealing features of an SMSF without the rigorous financial and administrative obligations. Super wraps are a subsector of the retail superannuation sector, and now comprise almost 50% of the retail sector by value. A wrap allows an investor to hold superannuation investments, such as managed funds and direct shares, under the one umbrella.
Here we compare some of the features of a SMSF against the super wraps. You won’t find an answer here about which is better, as this can only be ascertained by your adviser after considering an individual’s specific financial position and objectives.
- Investment Choice: A SMSF may hold any investment permissible under superannuation law including collectibles, real property, certain personal use assets and privately owned companies. A super wrap generally offers access to ASX 300 or ASX 500 stocks, a wide range of managed funds, term deposits, cash, and some offer access to stock on foreign exchanges.
- Funds Required: A starting balance for a SMSF should be at least $200,000 in order to achieve some cost efficiency. Balance in a super wrap is typically closer to $50,000, making this option accessible for more individuals.
- Trustee Responsibility: For a SMSF the members bear the responsibility of a trustee, whereas for a super wrap, members have no trustee responsibility.
- Tax Efficiency: SMSFs are tax efficient, as tax benefits ultimately benefit the members. Many super wraps report at the account level, ensuring tax benefits are attributed to individual members, whilst larger funds may have greater capacity to provide credits for CGT losses in the year they are incurred.
- Pension payments: In a SMSF the Trustee must ensure liquidity and minimum pension payment standards are met. In a super wrap, this is usually an automated process.
- Estate Planning: In a SMSF, death benefit nominations may be complex, potentially involving contingent nominations. There is a risk that surviving members/trustees may have incentive to thwart a deceased member’s estate planning arrangement. In a super wrap, individuals generally nominate only dependants or a Legal Personal Representative, and an arms-length trustee controls the fund, so valid death benefit nominations are generally effective.
- Winding up the arrangement: Winding up a SMSF can be complicated and may take many months. A super wrap can be closed within a few days.
- Dispute resolution and compensation: Generally, compensation available under superannuation law does not apply to SMSF members, and the only formal means of resolving conflict is via courts. SMSFs are regulated by the ATO. Super wrap funds must have formal dispute resolution procedures. Members may also have recourse to the Superannuation Complaints Tribunal. Super wraps are regulated by Australian Prudential Regulation Authority (APRA).
If you’d like to discuss whether a SMSF or super wrap is more suited to your situation, please contact David Heyworth or Kate O’Brien at Edney Ryan Wealth Management on (02) 9908 9888.
Kate is an Authorised Representative of Hillross Financial Services Limited (AR Number 1007833).