Ask the Expert: Ever heard of a wrap fund? Here’s how it compares to industry super
How is an industry fund different to a wrap fund and what are the advantages?
Question 1
Hi Craig, I am 70 and largely retired, with some part-time work earning $15,000 a year.
I have $1 million in a reasonable industry super fund pension account drawing 5 per cent annually. My wife is 64 and plans to work another three years ($80,000 a year) and has $800,000 in an excellent industry fund.
She owns $500,000 in shares. We own our own home and will downsize in four-five years and free up $500,000.
We know we are lucky but are conflicted with advice. We saw a financial planner who has suggested we pool our super in a wrap fund, including selling the shares over three years. Part of his argument is the return of tax credits to the wrap fund that are currently retained by our industry funds. The cost of the wrap fund is greater than our combined super expenses.
An alternative is my wife stays in her fund until retirement, I contribute some excess money to her ATO limit, and she can sell shares when she no longer earns a salary (if she wishes), thus paying less capital gains tax. And I go to the wrap fund. She may choose to join on retirement.
And then there’s SMSF … Which path should we take?
Industry funds and wraps both have their advantages.
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Industry funds are generally low cost and meet the needs of most people. Historically, they offered limited investment choice, but many now have a wide investment selection, including shares and ETFs.
Wraps offer an even greater level of investment choice (international shares, unlisted investments), more transparent and detailed reporting, and more control of tax outcomes.
Wraps are more expensive, but the higher your balance the more cost effective they become.
In relation to tax; to clarify, tax credits earned by your investments in a wrap are directly credited against your account.
In an industry super fund, it’s not correct to say they are “retained” by the fund. With an industry super fund, tax is calculated at a whole of fund level, not an individual one. Any tax is already incorporated into unit prices, so your balance should be net of any tax liabilities. However, you have no control over the tax yourself and outcomes are spread across all members.
It can feel like a big decision, and in some respects, it is. However, both options may still be appropriate.
These are the items to weigh up:
- Difference in fees
- How much of a tax advantage the wrap may provide
- Whether you want or need the additional investments and reporting the wrap provides
- Whether you want an ongoing relationship with the financial adviser
- Whether the adviser would be comfortable working with your current fund if you want to retain it
- Do you need ongoing advice, or, if you keep things simple, will you need reviews only every few years. The more complicated your portfolio, the more likely you will need more advice.
Sorry, there is no black and white answer.
You should look at an SMSF only if you want even more control and to be actively involved. Perhaps this option is not for you.
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In terms of the other strategies mentioned, selling shares down over some years, and/or after retirement to reduce CGT would seem to make sense.
Placing the proceeds from the shares and leftover property funds (after downsizing) into a highly tax effective structure like superannuation, again, also seems appropriate.
Once in a pension the earnings and payments become all tax free.
Question 2
We lost our business [used my superannuation] during Covid. My wife has only about $200,000 in super.
What are the implications if we do not make any arrangements? I’m a sole trader but am not making enough to have a super fund!
Not that you want to hear this now, but having your superannuation tied up in your business is a high-risk strategy.
While it has the potential to be a good investment, it compounds the risks, you can lose your business and retirement savings in one go.
It’s like the old saying “don’t put your eggs into one basket” – which makes perfect sense here.
Options from now are:
- Work longer than you originally intended
- Look for higher paying jobs
- Cut back on your lifestyle so that you can free up money to contribute some funds to super
- Lower your retirement expectations and be prepared to live on less
- A combination of the above.
In Australia we are lucky that we have a decent age pension. It doesn’t provide a luxurious lifestyle, but it does provide a good safety net to cover the essentials.
Age pension age is 67. If you have only little super, you should at least try to work until this age.
Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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