Industry funds outperform bank-owned funds

Nick BendelJun 23, 2017( 2 min read )

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Industry superannuation funds have delivered better returns than bank-owned super funds over the past 10 years, according to new data.

Industry funds in the SR 50Balanced Option delivered an average annual return of 5.11 per cent during the decade ending 31 May, according to SuperRatings.

That compares to 2.94 per cent per annum for bank-owned super funds – a difference of 2.17 percentage points.

Industry funds also outperformed their bank-owned counterparts over one year, three years, five years and seven years.

	1 year	3 years	5 years	7 years	10 years
Industry super funds	9.78%	7.92%	10.34%	8.71%	5.11%
Bank-owned super funds	7.57%	5.98%	8.42%	6.47%	2.94%
Outperformance	2.21 points	1.94 points	1.92 points	2.24 points	2.17 points

Confused about super?

You’re not alone

Underperformance can be costly

People who choose bank-owned funds over industry funds could have $220,000 less at retirement, according to calculations by Industry Super Australia (ISA), an association representing industry funds.

This assumes 40 years of work at an income of $80,000, as well as average annual returns of 4.5 per cent versus 6.5 per cent.

ISA public affairs director Matt Linden said the latest SuperRatings results highlight the benefit of choosing an industry fund over a bank-owned fund.

“With pension access tightening, compulsory superannuation is becoming increasingly central to the wellbeing of Australians as they age,” he said.

“This chronic under-performance of retail funds, which hold just over a quarter of all super savings, should be a big concern for forward-thinking policy-makers.”

Nick Bendel

Property Personal Finance Writer

A property and personal finance writer, Nick Bendel covers property, loans, credit cards, superannuation, and other bank products. Nick has previously written for The Adviser, Mortgage Business, Lifehacker, Business Insider, Yahoo Finance, and InvestorDaily, and loves getting elbow-deep in the latest ABS, APRA and RBA data.

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FAQs

All SMSFs are required to have an investment strategy, which should explain what assets the fund will buy and what objectives it will pursue. This strategy must be reviewed regularly.

Issues to consider include how much risk the SMSF will take, how easily its assets can be converted into cash and how it will pay out benefits.

Details

SMSFs are allowed to carry on a business under two conditions.

First, this must be permitted under the trust deed.

Second, the sole purpose of the business must be to earn retirement benefits.

Details

An SMSF is a self-managed superannuation fund. SMSFs have to follow the same rules and restrictions as ordinary superannuation funds.

SMSFs allow Australians to directly invest their superannuation, rather than let ordinary funds manage their money for them.

SMSFs are regulated by the Australian Taxation Office (ATO). They can have up to four members. All members must be trustees (or directors if there is a corporate trustee).

Unlike with ordinary funds, SMSF members are responsible for meeting compliance obligations.

Details

SMSFs have high set-up and running costs
They come with complicated compliance obligations
It takes a lot of time to research investment options
It can be difficult to make such big financial decisions

Details

Setting up an SMSF takes more work than registering with an ordinary superannuation fund.

An SMSF is a type of trust, so if you want to create an SMSF, you first have to create a trust.

To create a trust, you will need trustees, who must sign a trustee declaration. You will also need identifiable beneficiaries and assets for the fund – although these can be as little as a few dollars.

You will also need to create a trust deed, which is a document that lays out the rules of your SMSF. The trust deed must be prepared by a qualified professional and signed by all trustees.

To qualify as an Australian superannuation fund, the SMSF must meet these three criteria:

The fund must be established in Australia – or at least one of its assets must be located in Australia
The central management and control of the fund must ordinarily be in Australia
The fund must have active members who are Australian residents and who hold at least 50 per cent of the fund’s assets – or it must have no active members

Once your SMSF is established and all trustees have signed a trustee declaration, you have 60 days to apply for an Australian Business Number (ABN).

When completing the ABN application, you should ask for a tax file number for your fund. You should also ask for the fund to be regulated by the Australian Taxation Office – otherwise it won’t receive tax concessions.

Your next step is to open a bank account in your fund’s name. This account must be kept separated from the accounts held by the trustees and any related employers.

Your SMSF will also need an electronic service address, so it can receive contributions.

Finally, you will need to create an investment strategy, which explains how your fund will invest its money, and an exit strategy, which explains how and why it would ever close.

Please note that you can pay an adviser to set up your SMSF. You might also want to take the Self-Managed Superannuation Fund Trustee Education Program, which is a free program that has been created by CPA Australia and Chartered Accountants Australia & New Zealand.

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Funds that follow the rules are taxed at the concessional rate of 15 per cent. Funds that don’t follow the rules are taxed at the highest marginal tax rate.

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Four questions to ask yourself before taking out an SMSF include:

Do I have enough superannuation to justify the higher set-up and running costs?
Am I able to handle complicated compliance obligations?
Am I willing to spend lots of time researching investment options?
Do I have the skill to make big financial decisions?

It’s also worth remembering that ordinary superannuation funds usually offer discounted life insurance and disability insurance. These discounts would no longer be available if you decided to manage your own super.

Details

SMSFs can accept mandated employer contributions from an employer at any time (Funds need an electronic service address to receive the contributions).

However, SMSFs can’t accept contributions from members who don’t have tax file numbers.

Also, they generally can’t accept assets as contributions from members and they generally can’t accept non-mandated contributions for members who are 75 or older.

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SMSFs can invest in conventional assets such as shares, term deposits, managed funds and property.

SMSFs can also buy ‘collectibles’ such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine – although there are special rules that apply to collectibles.

Investments must be made on an arm’s length basis, which means that assets must be bought and sold at market prices, while income must reflect the market rate of return.

As a general rule, SMSFs can’t buy assets from members or related parties.

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SMSFs must maintain comprehensive records and submit to annual audits.

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