For various reasons, many SMSF members continue to maintain a separate industry or retail fund at the same time as their SMSF.
If you are one of them or considering doubling up, it’s important to understand the benefits of such a strategy and the potential pitfalls.
Why have both?
Reasons for having both an SMSF and an industry or retail super fund include:
To maintain existing insurance cover
This is probably the most common reason given.
Retail or industry-style super funds often provide low-cost life insurance, TPD (total and permanent disability) insurance, and income protection insurance.
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As these funds have a large member base, they can offer insurance coverage at extremely competitive rates, often through a ‘group insurance offering’.
It is possible for SMSF trustees to take out and hold insurance coverage for the members of their SMSF, but in most cases, the premiums would be higher than those available in other fund types.
So it’s quite common for SMSF members to keep an existing industry or retail fund account open to maintain their insurance coverage or for future insurance needs.
To keep tax components separate
Super balances are separated into two tax components. When a payment is made from your fund, it must be paid proportionately from these two components.
The components are:
Tax-free component: This mainly consists of your non-concessional contributions. These are contributions made with after-tax money. Any amount paid from the tax-free component of your super balance is paid to you or your dependents free from tax.
Taxable component: This is essentially the remainder of your super fund balance after you have deducted the tax-free component. So, this includes your concessional (before-tax) contributions and all the earnings inside your fund.
Any amount that is paid from the taxable component to a non-dependent beneficiary is taxed at 15% plus Medicare.
The proportioning rule governs how the tax components of your super withdrawals are calculated. So, a fund member can’t select from which component the payment is paid from. It must be paid proportionately from both.
This is why some individuals may choose to keep separate super funds for their different tax components.
For instance, if all your non-concessional contributions are made to your SMSF, then the SMSF will have an extremely high tax-free component. The only part of the SMSF balance that would form part of the taxable component would be the fund earnings.
Where applicable, you could then nominate a non-tax-dependent to be the recipient of any death benefit payable from the super fund with the higher tax-free component, resulting in a better tax outcome for your beneficiaries.
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For greater diversification and access to a professional investment team
SMSFs are often established to access investment opportunities that may not be available through other types of super funds.
This is most commonly seen with direct property investments.
So it’s not uncommon to establish an SMSF to gain access to these direct property investment opportunities, while maintaining an industry or retail fund for other, more traditional investments.
Having both super fund types allows the individual to diversify their investment options and strategies, taking advantage of the strengths of each type of fund.
It also allows access to professional investment teams who can better manage certain investments or asset classes, like shares, fixed interest and alternatives.
Award rules for employer contributions
Some industrial awards may require employers to pay super contributions to a specific super fund. This has become less of an issue in recent years with super ‘choice’, but it does still need to be considered.
Individuals who would like to have an SMSF but are affected by these industrial awards could consider establishing an SMSF for other, non-employer contributions and investment purposes.
Newly created SMSF
Members of recently established SMSFs may not yet have transferred (rolled over) their existing benefits into the new SMSF.
It is quite common for the individual to maintain their existing super fund until their SMSF is up and running.
Key considerations for fund members
There are a number of issues that need to be considered when maintaining multiple superannuation funds, including:
Running costs and fees
The running costs for an SMSF, including accounting, auditing and legal fees, are usually a fixed expense per annum. So, for an SMSF, the higher the fund balance, the less expensive the running costs on a percentage basis.
Industry and retail funds usually charge a fixed fee for the administration of your account and then a further investment fee based on your account balances. For these funds, the higher your balance, the higher the fees would usually be.
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Individuals who are members of both types of funds will usually end up paying more in fees, so it’s important to weigh these against the perceived benefits.
Insurance cover
If you have established an SMSF and decided to keep your industry or retail fund open to maintain your insurance cover, it is important to check for any fund-specific rules.
- Does your industry or retail fund require you to make contributions in order for your insurance cover to continue?
- Are you required to maintain a certain balance for your insurance to remain in place?
- What requirements are there for you to be an active member and for your insurance not to lapse?
You should check the terms and costs of insurance in your industry or retail fund and compare them to options available outside of super or in your SMSF.
It would also be worth seeking personal financial advice around the ongoing need for insurance inside super. This will be based on your personal circumstances.
Contribution caps
The annual concessional and non-concessional contribution limits apply to all your super funds combined, not separately to each fund.
If your total super contributions exceed the annual cap limits, then it generally results in you paying additional tax.
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If you are a member of multiple super funds, make sure you carefully track all contributions to all of your super funds.
Estate planning
Make sure that your estate planning wishes and needs are addressed for all of the super funds you may have. This would require you to have separate and specific death benefit nominations for each super fund.
The rules of each of your funds should be reviewed to determine what type of death benefit nomination can be used.
Estate planning can be complex, so consider seeking personal advice.
Administration obligations
SMSFs require significant recordkeeping and ongoing fund management and maintenance. These obligations exist no matter how much is invested in the SMSF.
Compliance requirements
In addition to the ongoing administration obligations, SMSF trustees also need to adhere to strict compliance requirements.
Once again, these requirements exist no matter how small or how large the SMSF balance may be.
The bottom line
While having multiple funds can be useful, it’s important to avoid unnecessary duplication. You should periodically review your position to check that the perceived benefits still exist.
Consider rolling over balances if you no longer need multiple accounts to avoid erosion by unnecessary fees.
Make sure you are aware of any fund specific rules around minimum account balances or required account activity.
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