When planning for your retirement, one of the most important decisions you’ll need to make is whether to invest in a Self-Managed Superannuation Fund (SMSF) or a traditional superannuation fund. Both options offers unique benefits and considerations, so understanding the differences will help you choose the best path for you and your family.
Here’s what you need to know.
Control and Flexibility
Self-managed super fund (SMSF): An SMSF gives you direct control over your superannuation investments. As a trustee, you and your fellow trustees (if applicable) make all the investment decisions, including choosing assets such as shares, property, and cash. This level of control allows you to tailor your investment strategy to align with your personal goals and risk tolerance.
Traditional super fund: Traditional super funds, including retail and industry funds, offer a more hands-off approach. Investment decisions are made by professional fund managers based on the fund’s investment strategy. While you may have some say in how your money is allocated within the fund’s options (e.g., balanced, growth, or conservative options), you generally have less direct control compared to an SMSF.
Fees and Costs
Self-managed super fund (SMSF): SMSFs can incur various fees, including setup costs, annual accounting, audit fees, and investment costs. While the management fees can be higher, especially for smaller balances (<$250K), an SMSF might be cost-effective for those with larger super balances due to the ability to tailor investments and reduce unnecessary fees.
Traditional super fund: Traditional super funds typically have lower upfront costs and charge ongoing fees based on a percentage of your balance. For larger balances, management fees can be higher when compared to the ongoing fees incurred with an SMSF. These management fees often cover administration, investment management, and insurance. While fees can vary significantly between funds, traditional super funds charge fees based on a fixed percentage of your account balance. This means people with larger balances pay more than those with smaller balances, even though the level of service they receive is typically the same.
Investment Options
Self-managed super fund (SMSF): With an SMSF, you have access to a wide range of investment options beyond standard shares and property. You can invest in direct property, collectables (like art, wine and cars), and even certain types of business ventures. This flexibility allows you to diversify your investments based on your personal preferences and market outlook. Investing through an SMSF also gives you the option to leverage your investment through borrowing and this can provide many advantages over traditional super funds.
Traditional super fund: Traditional super funds offer a selection of pre-determined investment options managed by professionals. These options usually include various asset classes and investment styles, such as growth, balanced, and conservative portfolios. While the range of choices is more limited compared to an SMSF, professional management can be advantageous for those who prefer a more hands-off approach.
Regulatory and Compliance Requirements
Self-managed super fund (SMSF): Managing an SMSF comes with significant regulatory responsibilities. Trustees must ensure compliance with superannuation laws, including regular audits, tax reporting, and adherence to investment restrictions. The complexity of these requirements means that SMSF trustees need a good understanding of regulations and they will generally need to engage an SMSF accountant to ensure the SMSF complies with all regulatory requirements on an annual basis.
Traditional super fund: Traditional super funds handle regulatory compliance and administrative tasks for you. This includes managing tax obligations, reporting, and ensuring the fund adheres to superannuation laws. This aspect makes traditional super funds a less hands-on option for individuals who prefer not to manage regulatory matters.
SMSF vs. traditional super fund: which is right for you?
- Time and expertise: If you have the time, expertise, and interest in managing your investments, an SMSF could offer greater control and potentially higher returns. However, if you prefer a more hands-off approach, a traditional super fund may be more suitable.
- Costs: Evaluate the costs associated with managing an SMSF versus the fees of traditional super funds. For those with smaller balances (less than $250K), traditional funds generally offer a more cost-effective solution.
- Investment goals: Consider your investment goals and whether you need the flexibility to invest in a diverse range of assets. SMSFs provide more flexibility, but traditional funds offer professionally managed portfolios that can meet various investment objectives.
- Regulatory compliance: Assess your willingness to engage an SMSF accountant or handle the regulatory and compliance responsibilities that come with an SMSF. Traditional funds manage these aspects on your behalf, reducing administrative burdens.
Ultimately, your choice should align with your retirement goals and comfort level with managing superannuation investments. If you’re unsure which option is right for you, consulting with a SMSF Accountant can provide tailored advice and help you make an informed decision.
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This article was written by Richard Ferraro, a friendly and approachable expert in the world of finance. Richard brings three decades of experience in Financial Accounting, Tax Compliance, and Advisory to the APS team. Before spending the past 12 years at APS, Richard was a partner in a top 100 accounting firm and served as a Taxation Manager for major corporations like Nissan Australia, Bendigo and Adelaide Bank, NEC Australia, and Australia Post.
Richard is dedicated to supporting his clients with a wide range of services, including tax compliance and advisory for Companies, Trusts, Partnerships, and Self-Managed Super Funds. His friendly demeanour and vast expertise make navigating financial complexities a breeze. When he’s not helping clients, Richard loves spending quality time with his family and friends. He’s an avid supporter of the mighty Magpies and enjoys anything related to cars, from F1 racing to Supercars and collectables.