SMSFs vs Super Wraps

Self-managed superannuation funds (SMSFs) and super wrap accounts are popular alternatives to retail and industry super funds for individuals seeking greater control over their investments and potentially lower fees.

SMSFs: A Growing Trend

The SMSF sector has grown significantly, now representing nearly $990 billion—around 25% of Australia’s $3.9 trillion superannuation industry. This growth has seen SMSFs surpass the retail superannuation sector, which is valued at $756 billion.

SMSFs offer unparalleled control and a wide range of investment options. However, managing an SMSF can be complex, requiring significant financial knowledge and time. Their cost-effectiveness depends on the fund’s balance and how much of the management the members handle themselves, rather than outsourcing to SMSF professionals. The complexities of running an SMSF have contributed to the rising popularity of super wrap accounts.

The Rise of Super Wrap Accounts

Super wrap accounts have emerged as an attractive alternative to SMSFs. These accounts, part of the retail super sector, allow investors to consolidate various investments—such as shares and managed funds—into a single platform. Unlike SMSFs, super wrap investors do not bear the responsibilities of being a trustee.

Key Differences Between SMSFs and Super Wraps

1. Investment Options

• SMSFs: Offer extensive investment choices, including property and collectibles.
• Super Wraps: Focus on managed funds, shares, term deposits, cash, and, in some cases, international shares.

2. Minimum Funds Required

• SMSFs: Typically need at least $200,000 to be cost-effective.
• Super Wraps: Require lower initial balances, often starting from $50,000, making them more accessible.

3. Trustee Responsibilities

• SMSFs: Members act as trustees, managing compliance and administrative tasks.
• Super Wraps: A professional licensed trustee oversees compliance.

4. Tax Efficiency

• Both options provide tax benefits. However, SMSFs offer greater flexibility in tax strategies, such as managing capital gains and franking credits.

5. Pension Payments

• SMSFs: Trustees must ensure compliance with liquidity and pension payment rules.
• Super Wraps: Pension payments are typically automated by the professional trustee.

6. Estate Planning

• SMSFs: Offer more control and flexibility in estate planning, particularly in directing benefits.
• Super Wraps: Decisions are subject to the fund’s rules and professional trustees’ discretion, depending on death benefit nominations.

7. Winding Up

• SMSFs: Closing can be complicated.
• Super Wraps: Can be closed more quickly and easily.

8. Dispute Resolution and Compensation

• SMSFs: Members must manage disputes privately, with costs borne by them, and there is no government-backed compensation for fraud or theft.
• Super Wraps: Members may qualify for government compensation in cases of fraud or theft.

Choosing the Right Option

Selecting between an SMSF and a super wrap depends on your financial circumstances, goals, and comfort with managing investments. It’s recommended to consult a financial advisor for tailored advice to help you make an informed decision and avoid costly mistakes.