Many people choose to set up self-managed superannuation funds (SMSFs) or wrap accounts as an alternative to retail or industry superannuation funds to gain more control over their investments and reduce fees.

SMSFs continue to grow 

The SMSF sector has experienced exceptional growth over the years now accounting for almost $990 billion or approximately 25% of the $3.9 trillion superannuation sector. This growth has seen SMSFs overtake the retail superannuation sector which is now worth about $756 billion.

Many people choose SMSFs for control over investments, but managing one requires financial knowledge and time. There’s no doubt that SMSFs provide the most investment options and control. However, their cost-effectiveness depends on how much money is in the fund and how much of the management the members can handle themselves, instead of hiring SMSF professionals to help them run and manage the fund. Managing an SMSF can be complicated, requiring both financial knowledge and enough time to meet all the responsibilities. This has led to the rise of ‘super wrap’ accounts.

Super wraps on the rise  

Recently, super wrap accounts have become a popular alternative to SMSFs because they offer some of the benefits of SMSFs without the responsibility of being a trustee. Super wraps are part of the retail superannuation sector and allow investors to hold different superannuation investments, like managed funds and shares, all in one place.

Key differences between SMSFs and super wraps

Some key factors to consider when choosing an SMSF vs a super wrap include:

  • Investment choice: SMSFs can invest in a wide range of assets, including real property and collectibles, while wraps mainly offer stocks, managed funds, term deposits, cash, and some offer access to stock on foreign exchanges.
  • Funds needed: SMSFs typically need at least $200,000 to be cost-effective, while super wraps can start with about $50,000, making this option accessible for more individuals.
  • Trustee responsibility: SMSF members act as trustees, whereas for a super wrap, the compliance responsibility lies with the professional licensed trustee.
  • Tax efficiency: Both offer tax benefits, but SMSFs have more flexibility to use tax strategies around capital gains, taxable income or franking credits.
  • Pension payments: In SMSFs, trustees must ensure liquidity and minimum pension payment standards are met. In a super wrap, this is usually an automated process managed by professional trustees.
  • Estate planning: SMSFs provide greater flexibility and control in estate planning if a member was to pass away. In a super wrap, an arms-length trustee controls the fund, so valid death benefit nominations and payment options will depend on the specific fund’s rules.
  • Winding up: Closing an SMSF can be complex, while a super wrap can be closed quickly.
  • Dispute resolution and compensation: SMSF disputes must be handled privately and settled through alternative dispute resolution methods or in court at the members’ expense, and there is no government-backed compensation scheme. Whereas super wrap members may be eligible for government assistance in cases of fraud or theft.

If you’re wondering which option is better, you should seek advice from a financial advisor who will consider your financial position, goals and circumstances. This will help you make an informed decision and avoid any costly mistakes.