Comparing Types of Superannuation

With various types of superannuation funds available, it’s important to understand their differences so you can choose the option that best aligns with your financial goals and lifestyle. In this article, we’ll explore the different types of super funds, including self-managed super funds (SMSFs) and how property investment can play a role within an SMSF.

What is Superannuation and Why Does it Matter?

Superannuation exists to provide funds for people to live on once they retire. It requires their employer to make compulsory payments over their working life, with other voluntary contribution options available if they wish to contribute to their own super. Understanding the various types of super funds and the investment strategies they offer is crucial to maximising your retirement savings.

Types of Superannuation Funds Explained

There are several types of superannuation funds in Australia, each offering different benefits, investment options, and levels of control. The main types include retail funds, industry funds, corporate funds, public sector funds, and self-managed superannuation funds.

Retail Superannuation Funds

Retail funds are run by financial institutions or banks and are open to anyone. They offer a wide range of investment options but typically have higher fees compared to other superannuation types. The financial institutions running these funds aim to make a profit, which can affect the overall fees and returns.

Key Features:

• Wide range of investment choices

• Suitable for individuals wanting flexibility

• Often have higher fees due to profit structures
  

Industry Superannuation Funds

Industry funds were originally designed for workers in specific industries but are now open to anyone. They are not-for-profit, meaning profits are returned to members, often resulting in lower fees than retail funds. These funds typically offer a limited range of investment options, but they can still provide competitive returns.

Key Features:

• Not-for-profit structure

• Lower fees compared to retail funds

• Limited investment options
  

Corporate Superannuation Funds

Corporate funds are arranged by companies for their employees. They’re typically used by large Australian companies, for example, Telstra. These funds can be tailored to the needs of the company and its employees. The fees and investment choices in corporate funds are generally competitive.

Key Features:

• Available through employers

• May offer tailored benefits

• Competitive fees and returns
  

Public Sector Superannuation Funds

Public sector funds are designed for government employees and typically offer generous benefits, including defined benefit plans where retirement pay-outs are guaranteed based on salary and years of service. These funds can be beneficial for long-term employees in the public sector.

Key Features:

• Defined benefit plans for long-term security

• Competitive fees and performance

• Available only to public sector workers

  
  

Self-managed Super Funds

SMSFs are super funds where members control the investment decisions. Unlike traditional funds, where decisions are made by a fund manager, SMSFs allow you to manage your own retirement savings. This includes choosing where to invest the money, such as shares, property, or other asset classes.

Key Features:

• Full control over investment choices

• Allows for diverse investment strategies, including direct property investment

• May be more cost-effective for larger balances

• Requires expertise and compliance management
  

SMSFs are often favoured by individuals with specific investment interests or larger balances because of the control they offer. However, managing an SMSF also comes with administrative responsibilities and compliance obligations set by the Australian Taxation Office (ATO), so it’s important to have the right team of experts by your side, for example, a financial adviser. 

SMSFs and Property Investment

One of the unique benefits of SMSFs is the ability to invest in direct property, which is not usually an option with other types of super funds. Property investment through an SMSF is often chosen by investors looking for a stable, long-term investment.

With an SMSF, you can purchase residential or commercial property, provided it meets the sole purpose test — meaning the property must be solely for the purpose of providing retirement benefits. It's important to note that you cannot live in or rent out residential properties owned by your SMSF to yourself or any related parties. Business real property may be exempt from these restrictions, so if you’re thinking about leasing a commercial property held inside your SMSF to a related business entity, check out our article on SMSFs Purchasing Commercial Property. 

Benefits of Property Investment in SMSFs:

• Potential for capital growth and rental income

• Ability to diversify your SMSF portfolio

• Direct control over property management decisions
  

However, property investment within an SMSF also comes with risks, including liquidity issues (difficulty selling property quickly) and the need for a large initial capital outlay. SMSF loans (limited recourse borrowing arrangements or LRBA) exist to allow the SMSF access to funding to purchase investment assets such as property. 

Which Superannuation Option is Right for You?

Choosing the right superannuation option depends on your personal circumstances, investment goals, and willingness to take on responsibility. If you want convenience and lower fees, industry or public sector funds might suit your needs. If you're seeking flexibility and control over your investments — particularly in property — an SMSF could be the right choice for you.

Before making any decisions, consider seeking financial advice to understand the full implications of each option, especially if you’re interested in setting up an SMSF and exploring property investment.

If you’d like to learn more about borrowing to invest in property inside an SMSF, please feel free to get in touch with us at SMSF Loan Experts.