Differences Between SMSF and Industry Super Funds

Choosing between a Self-Managed Super Fund (SMSF) and an Industry Super Fund is a significant financial decision for Australians planning their retirement. Both options offer benefits but cater to different financial goals, levels of expertise, and risk tolerance.

An SMSF gives individuals complete control over their investments, while industry super funds provide a hassle-free, professionally managed alternative. However, new research suggests that SMSFs may be cost-effective with a balance of $200,000 rather than the previously recommended $500,000, shifting the debate about their viability.

This article explains the differences between SMSFs and industry super funds, covering costs, control, risks, and recent legislative updates.

Let’s Get Straight to the Point

If you’re short on time, here’s a quick summary of the key differences:

• Control: SMSFs provide total investment control, whereas professionals manage industry funds.
• Cost-Effectiveness: New research suggests SMSFs are viable from $200,000, challenging the old $500,000 recommendation.
• Performance: SMSFs and industry funds offer similar returns once the SMSF balance reaches $200,000.
• Complexity: Industry funds require no management, while SMSFs involve ongoing administration and compliance.
• Regulation: Industry funds are regulated by APRA, while SMSFs fall under ATO oversight.
• Tax Benefits: Both structures offer tax advantages, but SMSFs provide greater flexibility in tax planning.

Now, let’s take a closer look at each factor in detail.

What is an Industry Super Fund?

An industry super fund is a not-for-profit retirement savings fund managed by professional investment teams. These funds were originally designed for workers in specific industries, but most are now open to all Australians.

Industry super funds aim to provide low-cost retirement savings by reinvesting profits into the fund rather than distributing them to shareholders. This structure helps members maximise returns over the long term.

Key Features of Industry Super Funds

• Professionally Managed: The fund’s investment strategy is handled by experienced financial experts. Members do not need to research, buy, or manage investments.
• Lower Fees for Small Balances: Many industry super funds charge fees as a percentage of the account balance, meaning those with lower superannuation balances are not burdened by high fixed fees.
• MySuper Options: These default investment strategies suit members who prefer a simple, hands-off approach. Options typically include balanced, conservative, and high-growth portfolios.
• Insurance Benefits: Most industry super funds provide built-in life, total and permanent disability (TPD), and income protection insurance.
• No Administrative Burden: The fund handles all compliance, tax reporting, and legal obligations.

Pros and Cons of Industry Super Funds

Pros:

• Hassle-Free Management – A hands-off approach suitable for those who prefer professional oversight.
• Regulated by APRA – Ensures consumer protection and transparency.
• Cost-effective for low balances – Fees are proportional to account balances, making them more affordable for members with smaller super funds.
• Diversified Investments – Members benefit from a spread of investments, reducing risk.
• Automatic Insurance Cover – Provides protection against unexpected life events.

Cons:

• Limited Investment Control – Members cannot choose specific stocks, properties, or other assets.
• Fees Can Increase Over Time – Percentage-based fees can accumulate significantly for high-balance accounts.
• No Direct Property Ownership – Unlike SMSFs, industry super funds do not allow direct investment in real estate.

What is a Self-Managed Super Fund (SMSF)?

A Self-Managed Super Fund (SMSF) is a private superannuation fund where members have full control over investment decisions. Unlike industry super funds, SMSFs are self-regulated, meaning the fund's trustees must ensure compliance with Australian tax and super laws.

SMSFs are popular among high-net-worth individuals and investors who want direct control over their superannuation. They offer a significant advantage in diversifying investments beyond traditional asset classes.

Key Features of SMSFs

• Complete Investment Control: SMSF trustees decide where and how funds are invested. Options include shares, property, bonds, and alternative assets like gold or cryptocurrency.
• Potentially Lower Costs for High Balances: Research suggests SMSFs become cost-effective from $200,000 onwards, contradicting previous claims that $500,000 was the minimum required for efficiency.
• Greater Tax Planning Flexibility: SMSFs allow trustees to structure investments to optimise tax efficiency.
• Pooling Family Super Balances: Up to six members can contribute to an SMSF, enabling families to consolidate and increase investment power.
• Direct Property Investment: SMSFs can purchase commercial or residential properties, subject to compliance regulations.

Pros and Cons of SMSFs

Pros:

• Full Investment Choice – Ability to invest in shares, property, ETFs, bonds, and alternative assets.
• Potentially Lower Fees at Higher Balances – Cost-effective once the $200,000 threshold is reached.
• Greater Control Over Tax Planning – Ability to strategically manage tax liabilities.
• Estate Planning Benefits – SMSFs provide more flexibility for inheritance planning.

Cons:

• Complex and Time-Intensive – SMSFs require active management, record-keeping, and reporting.
• Strict ATO Regulations – Non-compliance can result in heavy penalties.
• Not Ideal for Small Balances – Below $200,000, SMSFs tend to be more expensive than industry funds.

Industry Super Funds vs SMSFs: Key Differences

1. Investment Control

• Industry Funds: Managed by professionals with limited investment customisation for members.
• SMSFs: Full control over investments, allowing members to choose individual stocks, properties, and other assets.

2. Costs and Fees

• Industry Funds: Percentage-based fees that scale with account balances.
• SMSFs: Fixed administrative and compliance costs, meaning higher balances benefit more.

3. Performance & Returns

• ASIC previously claimed SMSFs under $500,000 underperform industry funds.
• The latest research suggests that SMSFs achieve comparable returns from $200,000.

4. Compliance & Regulation

• Industry Funds: Governed by APRA, ensuring strong consumer protections.
• SMSFs: These are regulated by the ATO and require trustees to ensure legal compliance.

5. Taxation & Retirement Planning

• Both fund types benefit from a 15% tax on investment earnings and a 0% tax in the pension phase.
• SMSFs offer more strategic tax planning opportunities.

Changes in Superannuation Rules

1. Super Guarantee (SG) Increase:
   • 11.5% in 2025, rising to 12% on 1 July 2025.
2. New Contribution Caps:
   • Concessional cap: $30,000 per year.
   • Non-concessional cap: $120,000 per year.
3. SMSF Member Limit:
   • Up to six members allowed.

Which Super Fund is Right for You?

Choosing between an Industry Super Fund and a Self-Managed Super Fund (SMSF) depends on your financial situation, investment preferences, and willingness to manage your superannuation. Each option has advantages and disadvantages that suit different types of investors.

Choose an Industry Super Fund If:

• You prefer hands-off investing
  If you want a set-and-forget approach to superannuation, an industry super fund is the best option. Your investments are professionally managed, and you don’t need to worry about compliance, paperwork, or investment strategies.
• You have a low to mid-range balance
  An industry fund is usually more cost-effective if your super balance is under $200,000. Fees are typically based on a percentage of your account balance, which can be lower than the fixed costs of running an SMSF.
• You value automatic insurance and lower fees
  Industry super funds automatically include life insurance, total and permanent disability (TPD) insurance, and income protection—all of which can provide essential financial security. These insurance options are often cheaper than if purchased separately.
• You want regulatory protection and simplicity
  Industry funds are regulated by APRA, ensuring strict governance and consumer protections. Members have no administrative responsibilities, making it a straightforward and safe option for retirement savings.

Choose an SMSF If:

• You want total control over investments
  If you prefer to make investment decisions, an SMSF allows you to invest in direct shares, property, bonds, alternative assets, and other specialised investments. Unlike industry funds, you are not limited to pre-set investment options.
• You have at least $200,000 in super
  Research indicates that SMSFs have become cost-effective at a balance of $200,000. Below this threshold, the fixed costs of managing an SMSF (such as auditing, compliance, and accounting fees) can make it more expensive than an industry fund.
• You need more flexibility in tax and estate planning
  SMSFs provide greater control over tax strategies, allowing you to minimise tax liabilities through different investment structures. They also offer better estate planning options, such as ensuring specific assets (like property) are passed down to beneficiaries without being sold.
• You are willing to take on compliance responsibilities
  Running an SMSF means you are responsible for ensuring compliance with tax and superannuation laws. This includes annual audits, financial reporting, and investment strategy documentation. If you are comfortable with these responsibilities (or willing to hire professionals to assist), an SMSF could be a suitable choice.

Conclusion

The latest research challenges old assumptions about SMSF cost-effectiveness, suggesting they can be viable from $200,000. However, SMSFs require more effort and responsibility.

An industry super fund remains an excellent choice for hands-off investors. An SMSF offers greater flexibility for those who want more control.

Before making a decision, consulting a financial adviser is always recommended.