What are the key differences between SMSFs and public offer funds?

The two most common types of superannuation fund in Australia are self-managed super funds (SMSFs) that are regulated by the Australian Taxation Office (ATO) and funds regulated by the Australian Prudential Regulation Authority (APRA).

APRA funds include industry funds, retail funds and corporate super funds.

These different styles of super fund are designed differently, each with their own characteristics and attributes for the ongoing management of the member’s retirement savings.

This article highlights some key differences to help you make an informed decision when you are weighing up which type of fund is right for you.

Fund size and demographics

SMSFs: Although there is a limit of six members per SMSF, statistics show that most SMSFs have one or two members. In fact, around 68% of all SMSFs have just two members with a further 25% of SMSFs having only one member.

The average SMSF balance is just over $1.45 million with the median balance being around $826,000.

The average SMSF member balance is just over $780,000 with the median member balance being around $467,000.

APRA funds: There is no prescribed limit on the membership numbers for APRA-regulated funds, however some funds may impose their own membership restrictions or requirements.

Based on data released from APRA as at 30 June 2023, the average member account balance for these funds was around $110,000.

You can view a full list of APRA-regulated superannuation funds.

Control

The key difference between SMSFs and APRA funds is the level of control fund members have and the resulting obligations that come with that control.

One requirement of being a member of an SMSF is that you must also act as a trustee of the fund (or director of a corporate trustee). This means all ongoing compliance obligations sit directly with the fund members.

SMSFs: The fund members have absolute control over their retirement savings. They are tasked with all decision-making processes for the fund, including strategic decisions that will ultimately affect each of the fund members.

For example, SMSF trustees decide when fund assets are purchased or sold and the timing of these transactions will often affect the tax outcome for the fund and therefore the fund members. The ability to control the timing of these transactions could create certain tax planning opportunities that can be specifically designed for the fund members.

SMSF trustees also have a greater level of control around the payment of members’ benefits, including pensions, lump sums and, in many cases, the payment of members’ death benefits. For some, this provides peace of mind around how their retirement savings will be dealt with; albeit, within the strict superannuation laws and fund specific rules.

APRA funds: These funds are managed by a specialist trustee or a board of trustees. All strategic decisions are made by the board of trustees, not the fund members.

The members have no control over the running of the fund.

Investment opportunities

SMSFs: Once again, SMSF trustees have complete control over where and how the fund’s assets are invested. There are, of course, legislative restrictions around related-party investments but, for the most part, SMSF trustees are able to invest how they like.

The trustees are required to prepare an investment strategy for their fund, a strategy that takes into account the retirement needs of the fund members. The fund’s investments would then need to be in line with that investment strategy.

As all fund members are also trustees, it would be a relatively easy and quick process for the fund’s strategy to be updated if and when required.

SMSFs are sometimes referred to as family super funds, as the fund members are often related. Combining the existing super balances of multiple family members within the one super fund could open up investment opportunities that may otherwise not be possible for smaller value funds.

Another unique opportunity for SMSFs is the ability to invest directly in real estate. The fund could own residential, commercial or retail property.

When you also consider the rules that allow SMSFs to borrow money to acquire assets within the fund under a limited recourse borrowing arrangement, you can start to see the real benefits of having a combined retirement savings vehicle for family members.

Some SMSFs are established with non-family members, for instance with business partners. By combining their super balances into an SMSF, it may provide an opportunity for the SMSF to acquire a property to run their business from. This is referred to as business real property. The rent that is paid to the SMSF by the business can then be used to fund the members’ retirement.

SMSFs are also able to ‘jointly’ invest with other investors, including related entities or even the fund members personally. This could also provide an option to acquire larger or higher valued assets within a shared ownership structure.

APRA funds: Most APRA funds offer their fund members access to investments in ‘pre-mixed’ investment options that are aligned to the member’s risk tolerance. For instance, conservative, balanced, growth or high-growth investment options.

Generally, members can also access specific asset types like local or international shares, property or fixed interest.

Although APRA fund members have a choice around the overall asset allocation for their superannuation savings, they are not usually able to choose a specific asset to invest in. However, some funds offer limited access to direct investments (see note below).

Insurance

SMSFs: There is no automatic insurance cover provided when you join an SMSF. SMSF members and trustees will need to apply for any insurance they may require by following the underwriting and application process requested by the insurance provider.

Although there is no formal requirement for insurance policies to be held for SMSF members, the fund trustees must at least consider the need for any insurance cover for the members when developing and reviewing their fund’s investment strategy.

In many cases, insurance premiums can be higher for SMSFs when compared to cover offered in APRA funds. The reasons often given for the higher cost of cover usually include the ‘purchasing power’ that APRA funds have with a much larger member base and the ability to spread risk over a larger member base.

APRA funds: Most APRA funds offer some level of default insurance cover, where fund members are automatically provided with certain types of insurance, usually life and TPD cover, when they become a member of the fund. 

This can prove cost effective for some members due to reduced underwriting or health assessment.

The level of insurance cover offered to fund members is generally based on the member’s age and profession. It is also common for the levels of default insurance cover offered by these funds to reduce over the years as members get older.

Costs

SMSFs: There is a common belief that SMSFs are more expensive than APRA funds, but this may not actually be the case for many funds.

SMSFs tend to have fixed fees for the services they need to ‘buy in’, such as accounting, audit and regulatory fees.

However, SMSFs may also have asset specific fees, which can vary considerably based on the underlying assets held in the fund.

For instance, the costs associated with the direct ownership of a property can be significant, including repairs and maintenance, rates and taxes, and the considerable purchase and disposal costs. So when comparing the costs of different funds, it is important to include these asset specific expenses in that comparison.

As SMSFs usually have fixed expenses, the higher the balance held in the SMSFs the more cost effective they become. Since SMSFs can include multiple members, typically a couple, they can benefit from pooling their super and effectively lowering their individual administration costs.

APRA funds: The fees applicable for APRA funds also vary depending on the investments held or investment option selected, especially where member choice options are used.

When comparing APRA fund fees, it is important to look at ALL costs that will be incurred including fees associated with the underlying investments chosen by the member.

The fees charged by APRA funds are usually a fixed dollar amount or a percentage fee based on your account balance. In some cases it may be both.

These fees must be reported to you each year in your annual statement.

The bottom line

As you can see, there are a number of key differences between APRA funds and SMSFs and the most appropriate option for you may change over time.

Although costs and fees are often the first issue raised, it may be that there are other factors more relevant to you personally. It may be that you don’t want the added responsibility of running your own SMSF, even if there may be a cost saving overall.

Or it may be that you want to be more involved in the management of your retirement savings, or the ability to invest in particular assets.

Whichever option you choose, it should not be a set and forget approach. It is always worth reassessing your options as your circumstances change.

The information contained in this article is general in nature. Your personal position has not been taken into consideration. You should seek personal advice before taking any action.