This is a guest post by a good friend of ours, Kristian Zuza, Financial Adviser & Partner at Peak Wealth Management Pty Ltd. Peak Wealth Management is an industry-leading Sydney based Financial Adviser and Wealth Management specialist.
Today we run through what it looks like to invest your superannuation through the 3 main types of funds we use in Australia.
We will take a dive into some of the key advantages and disadvantages of each along with what to look out for in certain situations.
The ongoing argument about the best way to hold and manage your superannuation wealth won’t be solved today, but you will be able to work out what one will work best for your situation.
There is no perfect fund/structure for everyone or any that any are guaranteed to be better than others.
We do know that some may be more appropriate than others based on what you want.
Table of Contents
Industry funds
Industry Superfunds were originally established to provide retirement savings for employees in specific industries like hospitality, construction or retail.
Today, most industry funds, especially the bigger ones are open to everyone.
Industry funds are not-for-profits which means the ‘profits’ would be retained in the fund.
Examples of industry funds: Australian Super, CBUS, Host Plus, Vision Super, Sunsuper, Legal Super and more.
Advantages
- Basic investment options can be relatively low cost – still gets you into the market.
- Good feel story of “returning profits back to members” even though many ask where they see a profit rebate/bonus.
- Easy to access, designed for everyone to use.
- Can come with a one-size-fits-all default level of insurance.
- Most will allow you to pay retail insurance via a rollover out of the fund.
- Typically have a lot of industry in-flow through partnerships.
- Provide free/basic level of general advice on superannuation related information.
Disadvantages
- Typically a one-size-fits-all approach.
- Where more sophisticated investment options are chosen, costs are quite high in comparison to what is available.
- Recommendations and advice are limited to that fund. Only pitching 1 product.
- Performance of ‘union/industry’ funds are built on a government distribution model administered by fair work which allocates employees retirement savings based on union affiliation, rather than by competitive forces.
- Lack of transparency and control.
- Limited estate planning functionality.
- Investments may contain illiquid assets.
Retail Superannuation funds
Retail superfunds are those that are run for-profit, they help generate company profits and the dividends would be paid out to whoever owns the shares.
Historically, these have been considered more expensive funds (typically only Master Trusts) for wealthier people who actively sought advice from fund managers, wealth managers, banks and more.
Nowadays there is so much variety in this space, including with the fees – cheaper options are available to compete with MySuper/Limited feature products.
If you match the product with the strategy they can be competitive across the board.
Advantages
- A huge range of investment options.
- Forced to be competitive due to product features not because of guaranteed industry capital-flow.
- Ability to have a tailored investment strategy for the individual.
- Added levels of control.
- Selection of investment structures for example – master trust, wrap accounts, unit trusts, separately managed accounts, direct share ownership and more.
- Some products allow advice fees to be charged directly from the superfund, allowing for advice without a huge burden on the client’s cash flow.
- Extremely low-cost options available depending on your balance.
- Some have the ability to have a tailored personal protection (insurance) plan attached. That way you only pay for what you need.
Greater flexibility with estate planning opportunities.
Disadvantages
- If the advice isn’t great people could be paying for structures/features they don’t use or need, eroding their balance.
- Can be more difficult for people to understand what to do in this retail space.
- Some products can have the commissions built-in, meaning advisers/managers can receive fees for not providing any real service.
- Added complexity to the ‘average person’.
- No feel-good story about profits going back to members.
- With added levels of control, people/clients/advisers can make poor decisions and leave them worse off if clients goals and position are not considered.
Self Managed Superfunds (SMSF)
Self-managed super funds (SMSFs) are just another way of saving for your retirement.
The difference between an SMSF and the other types of funds listed above is that the members of an SMSF are usually also the trustees.
What does that mean? The members of the SMSF run it for their own benefit and are responsible for the running of the fund and complying with super and tax laws.
When you manage your own super, you put the money you would normally put in a professionally managed fund (eg. industry or retail) into your own SMSF.
You run every aspect of the fund yourself.
Your SMSF can have up to four members, who are friends or family.
While having control over your own super can be appealing, it’s a lot of work and comes with its own risks.
For example, the tax office could penalise the fund heavily because the SMSF is non-compliant.
However, with a good team of professionals around you to make it work successfully.
There are a number of streamlined SMSF providers that provide this service to make opening and running an SMSF easy and compliant.
Advantages
- Investment choice and control – you can purchase residential and commercial property, direct shares, collectables and even more.
- Increased flexibility and more complex strategies can be beneficial when tailoring a plan to your personal goals and needs.
- Tax minimisation and control, for example, timing your contributions.
- Comprehensive estate planning strategies can be implemented because of the flexibility and control.
- Even greater asset protection opportunities especially for business owners. Assets within superannuation are typically protected from bankruptcy and being sued.
- Borrowing to invest in property is an option (leveraging investments).
- A savvy and well-informed investor can utilise the flexibility and achieve potentially greater results for their personal circumstances.
- Can be cheaper to manage if you have a high balance as administration and audit fees are generally flat, rather than a percentage of assets.
Disadvantages
- Compliance and legal obligations to run the fund compliantly are more significant than you would versus the other options.
- In the event of fraud, you might not have a large company to back you and access to compensation schemes on your behalf.
- You are personally liable for the fund’s decisions.
- In the event of a serious illness or death of a member or a relationship breakdown, this may have significant consequences on the fund.
- Can come with high costs to pay for the expertise to run it smoothly especially if the balance is small – like anything, it is important to make an informed decision and ensure it is appropriate for you.
- Investing in physical property via your SMSF comes with increased costs and restrictions when compared to purchasing in your own name.
Costs to consider when investing in property via SMSF
Here are some of the costs for a self-managed superfund along with a bare trust and industry cost estimates:
- Initial Advice – $2,400.
- Establishment of a Bare Trust – $1,500, including the $479 ASIC Incorporation Fee.
- Additional legal fees.
- Stamp Duty on the property.
- Property Management fees of 4% – 10% depending on the area.
- Bank fees – interest rate of borrowing is about double what it is in your personal name, loan establishment cost can be up to 1.5% loan value.
- Accounting Fees $- 1200+.
- Will have to hold multiple years of interest payments in cash depending on the lender’s requirements.
As you can see, if you are buying a property in the SMSF, you would probably want to have a minimum balance of $350k+ and be confident the property will grow at a good rate or you might find yourself paying huge costs for a poor net return.
From an asset structuring perspective, owning a property in your own name would be significantly cheaper than owning it in an SMSF structure … It is important to think about these things when acquiring assets.
We see this strategy work really well with self-employed people who purchase their own commercial premises through the SMSF. Essentially speaking, their company will pay rent directly into the SMSF.
With the SMSF property path, you may also find yourself not liquid enough to run a successful pension strategy (0% tax environment).
Between 4% – 10% need to be paid out annually in line with legislation, if you don’t have that liquidity it is a problem.
It is extremely important to look ahead as to what the goals of each decision are here especially with assets that are not liquid.
Costs to consider when investing in direct shares via SMSF
Costs for an SMSF when investing in shares can vary greatly depending on a few factors:
- Type of asset – Stocks, Options, Futures, Managed Funds and more.
- Overall strategy – Did you want to take control of your super or did you want additional Personal Advice from your Financial Adviser?
- Investment strategy – buy and hold is generally cheaper. However, since SMSF’s are a low tax environment, higher turnover can be cheaper when inside an SMSF environment.
There is typically significantly fewer costs associated with running an SMSF for equity investments than property investments.
- Initial Advice – $2,400.
- Establishment cost – $1,500, including the $479 ASIC Incorporation Fee.
- Ongoing advice fees $1,200 minimum.
- Ongoing accounting fees $1,200 minimum.
- Brokerage – varies depending on the level of advice.
Flexibility is the key to consider when we look at an equity-focused strategy through an SMSF.
It really does open up your investment options and for the most part, can help with liquidity in your portfolio so future pension strategies can be successfully met.
If you already have a property in your SMSF, this can complement it well to have a better-diversified portfolio.
SMSF’s has more flexibility in offerings where the others are limited, an example is unlisted assets/purchase of unlisted companies.
Having specialist professionals in various departments to work with you can make all the difference when it comes to wealth creation in an SMSF.
Conclusion
As you can see, there is no right or wrong way to invest your super.
You’ve just learned some of the options you have with your superannuation, and you probably have an idea which area you want to be in.
It comes down to what you want, your circumstances, your preferences and most importantly your goals.
Each type of fund has its place in the Australian market.
The important thing is that you make an educated decision, put a well-structured plan in place that will get you to where you want to be.
