There are a number of reasons why some Australians have both an APRA regulated superannuation fund as well as an SMSF. Still, first, it’s essential to understand the differences between the two.
According to the Australian Prudential Regulation Authority (APRA) and the Australian Tax Office (ATO), Australians have around $3.5 trillion in superannuation investments, spread across more than 23 million different super fund accounts.
The total number of super accounts is quite telling, given that Australia’s population is currently just under 26 million.
According to the ATO, over 12 million Australians have one super fund account only. But around 4 million people have two or more, which explains why there are almost as many super accounts in Australia as people.
What’s also interesting is how Australians are choosing to have their super money managed.
Of the total super pool, roughly $1.8 trillion is managed by industry, retail and corporate funds regulated by APRA.
On top of that is a further $870 billion held in self-managed super funds (SMSFs) regulated by the ATO, which is being invested on behalf of around 1.1 million members.
The last major super chunk is about $800 billion being held in government-administered public sector super schemes.
But beneath those numbers is another interesting super fact.
While the majority of Australians have APRA-regulated super fund accounts only to receive and manage their super contributions, and a large number of people only have an SMSF account, many people have both.
Why would they have both? There are a number of reasons, but first, it’s essential to understand the differences between APRA funds and SMSFs.
APRA-regulated super funds
Most working Australians have their compulsory super payments made into professionally managed superannuation funds, which operate under the supervision of APRA.
APRA funds provide their members with access to a broad menu of managed financial products that can be chosen based on individual investment preferences.
These are usually pre-packaged investment products with set asset allocations to shares, bonds, and other types of assets.
These products are often labelled as “conservative”, “balanced”, “growth”, and “high growth” investment options based on their relative exposures to growth (shares) and defensive (bonds/cash) assets.
Another big drawcard for APRA funds is the investment and technical expertise that they can provide to their members.
For instance, to make the asset allocation process even easier for members, some professional funds now provide lifecycle products that are designed to automatically adjust a member’s investment mix according to their age.
These products focus primarily on investing in growth assets when members are younger (and can tolerate more investment risk), and gradually introduce more defensive investments as members age to lower their investment risk.
APRA funds often also enable members preferring to have more of hands-on approach to their super to choose their own sector exposures.
For example, they can construct their own investment portfolio with selected weightings in Australian and international shares, Australian and international fixed interest (bonds), and cash.
Beyond investing options, another key offering from APRA-regulated super funds is insurance – generally death, total & permanent disability (TPD), and income protection – to eligible members.
Because of their bulk purchasing power with insurers, the insurance premiums provided are typically lower than going directly through an insurance provider.
Also, the insurance premiums are deducted from the member’s super account, so there’s no direct out-of-pocket cost.
It’s important to understand all the costs that you’re paying to your chosen APRA fund. Some charge much higher costs than others.
The lower your overall costs, the more money you’ll have for your retirement over the long term.
ATO-regulated SMSFs
Some people simply want greater control over where their superannuation money is being invested.
That’s the key driver behind the establishment of around 600,000 SMSFs in Australia, with the majority having been set up for the single purpose of investing into assets that APRA funds don’t offer to their members.
Think of residential and commercial properties, private equity holdings, and more obscure investments such as collectable art, motor vehicles, and rare coins.
SMSFs are a type of trust structure, and their members are typically the trustees who choose where the fund will invest.
To make an investment, an SMSF trustee simply has to withdraw cash from a linked bank account.
ATO data shows the biggest investment holdings of SMSFs are Australian shares, direct property, managed investments, and cash.
But if running your own fund sounds appealing, keep in mind that SMSFs are expensive to set up and operate and – although having more investment options than APRA funds – they must comply with very strict regulations.
SMSFs can only have a maximum of six members and must meet what’s known as the sole purpose test to be eligible for the same low tax concessions available to APRA funds.
The test means a fund (including an APRA fund) needs to be maintained for the sole purpose of providing retirement benefits to its members, or to their dependants if a member dies before retirement.
Contravening the test can result in a fund losing its concessional tax treatment, and in fund trustees facing civil and criminal penalties.
Beyond regulatory constraints, SMSFs have some general disadvantages for their beneficiaries.
For one thing, unless members are investment experts or have invested wisely, SMSF vehicles are unlikely to outperform the investment returns delivered by the professional portfolio managers employed by APRA funds over the longer term.
Costs are high. SMSFs need to pay annual accounting, auditing, administration and other ongoing fees associated with their investments.
If insurance protection is added for members, it’s also likely that the premiums will be higher than those paid by APRA funds.
It doesn’t have to be one or the other
In reality, for some of the reasons outlined above, a large number of SMSF members are also members of APRA super funds.
In fact, many SMSF members choose to receive their compulsory 10.5 per cent employer contributions and to make additional salary sacrifice contributions into an APRA fund account instead of their SMSF account.
It’s sort of an each-way super bet, with additional benefits.
While they may have more investment alternatives using their SMSF, including direct property, they can benefit from having their regular contributions invested into more traditional super products.
In doing so, they gain access to the professional skillsets of investment managers, low-cost products designed to maximise retirement returns, discounted insurance protection, and to additional professional services.
They may have a specific investment need for having a SMSF but covering both bases via an APRA fund can be a good overall long-term super strategy.
