SMSF and Industry Fund: Which is better?

One of the most important decisions as you plan your retirement is your choice of route when it comes to superannuation. You have two options: a self-managed superannuation fund (SMSF) or an industry fund.

It might be tricky to decide which of the two you should choose but each option has its own benefits and drawbacks.

What is the difference between industry funds and SMSFs?

The main difference between the two superannuation funds boils down to the structure: an SMSF, from its name itself, is self-managed while an industry fund is more widescale, and managed by industry associations and members.

Industry fund

An industry super fund is a not-for-profit organisation that benefits the members - this means that any profits the fund makes are reinvested.

Typically, industry funds are operated by trade unions and employer associations in certain fields like hospitality, healthcare, and construction. This meant that members should only join if their professions belong to specific industries. Most of these funds, however, are now open to the public.

Employers might provide you with options to join a super fund affiliated with your industry, but you are in no way obligated to join - you are still free to choose any super fund you would like to participate in.

It is important to mention the existence of retail super funds — they work similarly to industry funds except for the not-for-profit part.

Retail funds are offered by investment companies and banks. While they offer a wider range of investment options, they also come with higher fees.

SMSF

An SMSF is a private superannuation, where everything is do-it-yourself - from managing and overseeing the members to strategizing the fund's investments.

SMSFs can have no more than six members, who also serve as trustees of the fund.

However, for SMSFs running under a corporate trustee structure, a company must be established, and members will serve as directors.

Similar to industry funds, SMSFs are for the purpose of building wealth for its members.

What are the advantages and drawbacks of industry funds?

Industry funds are generally popular among many Australians because it offers convenience — members are not responsible for managing the fund.

It is still important however to know the advantages and disadvantages of an industry fund from a different perspective to know if it is the right route for you.

Advantages of an industry fund

• Industry funds charge lower fees as they are run for the benefit of the members.

• The not-for-profit nature of industry funds allows them to reinvest their profits.

• Industry associations can provide members with specialised insurance coverage.

• Professional licensed trustees are responsible for managing the funds.

Disadvantages of an industry fund

• Investment options are limited, and strategies rely on the management of the fund.

• Industry funds do not offer freedom when it comes to individuals who would like to invest in specific industries or asset types.

Advantages of an SMSF

• SMSFs provide you with an opportunity to access a range of investment options.

• You can benefit from concessional tax rates.

• There is flexibility when in terms of pension accounts.

• Given that you manage directly, decisions are quick, preventing potential losses.

Disadvantages of an SMSF

• SMSFs require members to be hands-on — there is a need for members to always do their research regarding investment options.

• SMSFs have no access to government compensation schemes.

• It can be hard to access dispute resolution bodies with an SMSF.

Questions to ask yourself to know which type is right for you

It’s not just a yes or no question of whether either is the one for you — neither is a one-size-fits-all option, and you should consider several factors before deciding which one to choose.

If you are considering setting up an SMSF, here are some of the questions you might need to answer:

• Do you feel confident that you have the knowledge and skills to manage your fund’s investments?

• Are you aware of the legal obligations involved in owning an SMSF?

• Do you need additional benefits that SMSFs cannot provide?

• Do you and your co-members have enough super to make SMSF cost-effective?

On the other hand, these are the questions you might need to ponder if you are thinking of getting an industry fund:

• Do you want the freedom to invest in assets you want to?

• Do you like to regularly check the fund’s performance?

• Do you feel like you are missing out on other possible investment options?

Is it possible to have both an SMSF and an industry fund?

If you want the best of both worlds, you can certainly have both an SMSF and an industry fund.

While there are no laws prohibiting Australians from getting involved in an SMSF and an industry fund, you must take into account the fees and charges involved in both — you do not want to potentially reduce your overall retirement income due to unnecessary fees.

It is highly encouraged to talk to a financial adviser to know your options better and find the one that fits your investment strategy and plans for retirement.

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