Pooled vs segregated assets refer to the investment strategy of a self managed superannuation fund (SMSF).
A self managed superannuation fund is a specific type of super fund that has fewer than five members.
Generally, all members of a SMSF are trustees of the SMSF, or directors of the SMSF’s corporate trustee.
The trustees must formulate, review regularly and give effect to an investment strategy.
The trustees of a SMSF can choose to run either a pooled or segregated investment strategy for members.
There are advantages and disadvantages with both pooled and segregated funds.
A pooled investment strategy can also be referred to as unsegregated.
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Pooled vs Segregated Funds SMSF
The difference between pooled and segregated funds is that all of the assets of the SMSF are attributed to all members under a pooled investment strategy, whereas each member or class of member has specific assets supporting their balances under a segregated strategy.
For example, growth-orientated investments may be more suitable for members in accumulation phase and defensive income-orientated assets may be more suitable for members in pension phase.
Therefore, under a segregated investment strategy, the trustees would allocate growth assets (and associated earnings) to accumulation members and income assets to retirement phase members. Whereas, under a pooled investment strategy, all SMSF members would have their balance invested identically and each balance would represent a portion of the SMSFs overall assets on a proportional basis.
Choosing unsegregated over segregated or vice-versa in neither right nor wrong. It is simply a matter of preference for SMSF members and trustees.
The majority of SMSF trustees will run a pooled investment strategy. The main reason for this is because it is generally easier and cheaper from an administrative perspective. Also, in most cases, SMSF members are spouses of similar age, so the same investment strategy is often suitable for both of them.
Pros and Cons of Pooled Investments SMSF
Detailed below are the advantages and disadvantages of running a pooled or unsegregated investment strategy within a SMSF.
Advantages of Pooled Assets in SMSF
Simplicity: The administration and accounting of pooled funds is much simpler than a segregated strategy.
Costs: Because the administration and accounting are usually easier, the costs are often lower too.
Purchasing Power: By pooling all member balances, the SMSF is able to invest in larger assets such as real property, or get direct access to wholesale investments.
Disadvantages of Pooled Assets in SMSF
Shared Strategy: By pooling assets, all members of the SMSF will need to have the same investment strategy as each other. This may not be suitable, particularly for members of varying ages, or different risk profiles and objectives.
Tax Inefficiency: Pooling assets does not allow for specific assets to be held in different tax-environments (accumulation vs pension phase), which may limit the tax-effectiveness of the strategy.
Pros and Cons of Segregated Investments SMSF
Detailed below are the advantages and disadvantages of running a segregated investment strategy within a SMSF.
Advantages of Segregated Assets in SMSF
Specific Strategy: Segregating assets allows for certain assets to be attributed to particular members or class of members, specific to their age, objectives and risk appetite.
Tax Efficiency: Segregating assets can allow, for example, growth-orientated assets to be held for accumulation members, limiting income tax within the SMSF, and income-producing assets for pension members, where no tax is payable on earnings.
Disadvantages of Segregated Assets in SMSF
Complexity: The administration and accounting of segregated funds is more complex than an unsegregated strategy.
Costs: Because the administration and accounting are usually more complex, the costs are often higher too.
Limited Investment Choice: Less capital available for bulk purchases under a segregated strategy could mean certain assets, such as real property and wholesale investments, might not be accessible.
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Hi Chris,
My wife (61) & I (65) have a SMSF and have been drawing a transition to retirement pension for a number of years. The investments have been pooled thus far for simplicity and ease of administration. Is it possible to change to the segregated method to make use of the 0% tax on earnings post 65 in my case? Is this as simple as nominating the income generating assets to my account based on the end of year account balances? Can I revert to pooled investments in 3 years when my wife reaches the age of 65?
Hi Jude, you dont need to run segregated assets to have your portion of the savings receive tax free treatment. The administrator of your SMSF needs to know each of your respective member balances and then calculates the proportion of the taxable/tax-free earnings based on that.
However, if you wanted specific assets to support your income stream and specific assets to support your wife’s accumulation account, then you would need to run a segregated strategy. You should speak to your Fund’s administrator/accountant to determine what needs to be done to segregate the investments. You will likely also need to update the Fund’s investment strategy.
There should be no issue with reverting back to a pooled investment strategy when she reaches age 65.
Be mindful that your Fund’s Trust Deed and Investment Strategy need to allow for segregated/pooled investment strategies.
Chris
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