I get it. Superannuation is confusing. It’s a world that’s filled with fancy terminology and acronyms that most of us don’t understand.

But superannuation is your wages in retirement, so you need to take an active approach to it.

Of course, that’s easier said than done when you don’t understand the basics.

So let’s break it all down and put some of that jargon into everyday language, to help you get to grips with and make more informed decisions about your super.

---

Do you know what the three different types of superannuation available to you are?

They are:

• Industry Funds
• Retail (or Platform) Funds
• Self-Managed Funds

Industry Funds

Industry funds are the super fund type that most Australians have their superannuation invested in.

They are not-for-profit funds that are owned by the members of the fund. These funds give profits back to members in the form of lower fees, instead of paying profits to shareholders like many retail super funds do.

An industry fund is a cheaper alternative for most people and is a no-fuss, no hands-on approach to superannuation. You’ve seen the ads – compare the pair and the like.

While these types of funds are indeed more affordable, it’s important to make sure you that are in a fund that is working actively for you and giving you the best possible benefit. The government recently issued a list of 13 funds that they said were underperforming or their fees were too high.

Just because you are in an industry fund, doesn’t mean that your money is being looked after as best it could be.

It’s up to you as an individual to have a look at the performance of your fund, to look at what fees you are paying, and of course, make the move if you need to.

So, who is the ‘industry’ in industry funds?

In the early days, industry funds were run exclusively for a particular industry or trade. For example, the hospitality industry was long represented by Hostplus, while UniSuper was run for higher education workers only. But as many of these funds have grown or merged, the majority now accept members from all industries.

In an Industry Fund, the fund manager collects funds on behalf of the superannuant (the person whose super it is).

In other words, they invest on your behalf, and they manage your money on your behalf. They pay the tax to the tax office that you need to pay and will manage your payments when you retire. You have no visibility over what they’re investing in or how they’re investing. All you see is what your fund is worth, what percentage it’s grown by and what your fees are. That’s the level of your visibility.

And for some people that’s fine.

In exchange, you pay them a management fee. For most funds, that will be a percentage of what your fund is worth – and then there’s generally a monthly administration fee and sometimes other charges as well.

Inside an industry fund, you can get insurance for income protection, life insurance and other personal insurance policies. And it generally will be a good low-cost option. A word of warning, however – make sure you read the fine print. Some of these policies only last a limited time.

You need to understand what you are signing up for. Have you taken a policy out that will cover you to the age of 60 or the age of 65? Or is it just a two-year policy? Don’t tick a box and assume you’re adequately covered. Remember, knowledge is power and it’s up to you to understand what you are ticking and what you’re signing up for.

As mentioned, the real downside of an industry fund is that you don’t have any visibility around where the fund is investing, and where they are spending money. Some of those industry funds have spent an exorbitant amount of your money on sponsorship (think tennis tournaments, golf tournaments or football teams) and advertising.

Industry funds will argue that sponsorship and advertising is how they get people to know about their fund, and therefore make more money. I don’t know whether that’s the case or not, but the simple fact is you just don’t know how and where they are spending and investing your money.

There can also be liquidity issues. For example, if a certain age group retire all at once the fund may be forced to sell down assets.

So, there’s some positives and some negatives, like all three funds that we’ll talk about.

RETAIL FUNDS

The next one is a retail (or platform) fund.

A retail fund is sort of halfway between an industry fund and a self-managed super fund (SMSF).

Retail super funds are usually run by bank and wealth management companies. The company that owns the platform generally aims to keep some profit and this is paid to shareholders of the company.

In a retail fund, your money is invested by the platform where you chose what you buy and sell . The fund manages all of this for you. Your money is invested alone – it is not grouped or pooled in with other people’s money.

You have the ability in a retail fund to invest in certain assets that you want to invest in. This gives you both visibility and control.

In a retail fund, you will generally have somebody managing it for you, and that’s where a financial adviser comes into play.

The platform will look after all of the tax and compliance obligations, but you get to invest in whatever shares or managed funds you want to invest in. As long as that platform allows you to buy those type of shares – there are some limits to what you can invest in on a platform, and that’s the downside of it.

You will, of course, have to pay fees. Like the industry fund, this will be based on a percentage of what you have invested. There will also be monthly charges and administration fees. So, a cost benefit analysis should always be done to see whether that platform is the right type of superannuation for you to have, or whether you’re better off to be in an industry fund.

But again, that’s the beauty of a financial adviser. They will look at all of those things and help to determine what is best for you.

If you want more control and are interested in the share market, a retail super will give you that, without the responsibilities of a SMSF. It will allow you to have a bit of a play, invest your money in the shares that you want to invest in, or the investments that you want to invest in, rather than an industry fund where you’re just told what investments you get.

The downside of a retail fund is that there’s not necessarily as much diversification. Your eggs quite often can be in one basket, as they say, whereas in an industry fund, because they’ve got so much money that they’re investing, they will have it spread across a lot of different types of investments.

So, you’re not quite so as exposed in an industry fund as you possibly can be in a retail fund. But a good financial adviser will help you with where to invest and ensure you spread your risk through diversification. So that if one market drops, you’ll get a counterbalance in another market.

SMSFs

The third and final type of superannuation fund is what we call a SMSF or self-managed superannuation fund. A SMSF is a private super fund that you manage yourself.

You have to do everything. You choose the investments and the insurance. You are personally liable for all the fund’s decisions. You are responsible for tax and accounting, keeping records, and arranging an audit each year by an approved SMSF auditor. If you’ve got property, you must ensure that you’ve done a valuation of those properties and that you’ve followed all the rules and regulations.

It is a lot of work and requires skill and experience. That’s why most people use a financial adviser to help manage their SMSF and ensure they remain complaint. The consequences of getting a SMSF wrong are quite significant. Your fund can be made non-complying, which means that it can no longer accept any more contributions until it is made complying. Sometimes that can’t even happen, and you have to start a new fund. The ATO can also charge you penalties for non compliance.

If your fund becomes non-compliant, you may have to pay more tax on it.

So, there’s a few things that you need to be aware of before you decide to start a SMSF. And you need to have an active involvement in it. It’s not a set and forget, like an industry fund.

So why would you want an SMSF over a retail or industry fund?

Well, in a retail or industry fund, you can’t have property. With an SMSF, you can invest in commercial and residential property as well as certain collectibles.

Perhaps you want to buy shares that the platform super doesn’t allow you to buy. SMSFs give their members control, flexibility and choice over how their retirement savings are invested.

But again, this is not without risk or responsibility.

So, there’s some ups and downs or pros and cons to all three fund types.

WANT TO KNOW MORE?

If you want to know more, jump on over to our website and download our free super resources – including a list of pros and cons of the three fund types.

Of course, if you still have more questions, reach out to us here at 123 Financial Group and we’ll be more than happy to walk you through what those three different types of superannuation investments look like for you and make an individual assessment as to whether you should be in an industry fund, a retail fund, or a SMSF.

One final word or warning – over the years I’ve heard a lot about people being contacted by developers to create a SMSF in order to purchase property. They promise a return of 10% and a guarantee on your rent. However, they forget to tell you the cost of running that SMSF. Always get professional advice from an accountant or adviser before signing up.

It’s not as simple as you may think and there are lots of rules around using a SMSF to purchase property. It can’t be your own property for example, and you can’t live in it.

If you purchase a residential property inside a SMSF, what happens when you retire? Has the loan been paid out so that you are actually generating an income from that rental property?

Remember, your superannuation needs to give you money in retirement. There’s no point having a residential property inside a self-managed super if the rent is only just covering the mortgage repayments and the cost of holding that property. What is left over for you? So, there’s a lot of things that come into play with SMSFs – and it really is something you need to step into very cautiously and with a lot of knowledge behind you.

So again, reach out to us here at 123 Financial Group. We’d love to help fund the best option for you.