SMSF vs Super Wrap
Many of our clients choose to establish self-managed super funds or wrap accounts in preference to general retail superannuation. This is often borne from a desire to control the investment opportunities and reduce fees.
A superannuation account is created in discussion with a financial planner to establish the most appropriate investment type for your situation. More recently wrap accounts have become a popular choice for investors as an alternative to SMSF’s for those seeking greater control of investment than standard retail super with lower risk and responsibility required for an SMSF.
What is the right super choice for you? The answer to this requires consultation and advice from a financial advisor considering your financial position, goals and circumstances.
Here we aim to assist your understanding of the difference between SMSF and wrap accounts.
Self-managed super funds offer the widest range of investment options and control. Cost effectiveness of an SMSF depends on the level of funds held and how much of the trustee responsibilities are handled by individuals versus outsourcing to professionals.
Self-Managed Super funds can be complex to run, require a high level of financial understanding and also time required to manage the funds.
The complexity of the SMSF has led to a new wave of superannuation called a super wrap. Super wraps are effectively a sub-set of the retail superannuation sector where investors have greater control over their investment opportunities. A wrap allows an investor to hold superannuation investments, such as managed funds and direct shares, under the one umbrella.
Major factors to consider when choosing an SMSF vs a Super wrap:
- Investment Choice: An SMSF may hold any investment permissible under superannuation law. This may include 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).