Should I invest inside or outside my super fund?
If you’re at that point where the mortgage is paid off (or close to it) or you’re a high income earner with some extra cash, often one of the big questions is: what should I be doing now? Should I invest in super or outside super? Because you can get tax concessions from maximising the salary sacrifice or concessional contributions limit ($25,000 a year), this strategy is generally a no-brainer as a way to help boost your super. If you’re already maximising that limit and you’ve got some spare cash left over, now’s the time to look at where you invest your spare cash flow to boost your wealth!
SUPER IS TAX EFFECTIVE
Even with the big changes that started in 2017, super is a very tax-effective vehicle. Money inside super is taxed at a maximum 15%. This compares with money invested in your personal name, which can be taxed at up to 47%. If you or your spouse are currently low income earners you may be able to accumulate assets now in your personal name at lower tax rates but as those assets (and income) grow you could face significantly higher tax rates in the future. On the other hand, when you get to retirement, up to $1.6 million can be held entirely tax free in the super environment.
LET’S TALK GOOD VALUE
The other aspect to consider is the cost of investing – from a time and fee perspective. Despite the negative media coverage about super, there are plenty of very good funds, where the investing, reporting and administration are done by the super fund for no more than 1% a year for a fairly sophisticated service. Investing personally can incur much higher fees due to the lack of competitive pressures. Investing through super is quite efficient: you can switch your contributions into a new investment option; get insurance within the fund; and comparing and switching can easily be done (relative to the massive range of non-super investments) – but before making changes it’s important to check it out.
One downside of investing in super is that funds are locked away until you reach your preservation age and retire, generally 60 at the earliest. Therefore, if you have more than 15 years until retirement consider a combination of boosting super and investing outside super. This way part of your savings can grow in the tax-effective super environment but you also benefit from having access to funds invested outside super.
WHEN IT MAY NOT MAKE SENSE TO USE SUPER
If you have more than $1.6 million in total super, you won’t be able to make any non-concessional contributions so you may need to invest outside super. In this case, structures such as a trust or company can be advantageous, but they’re generally only worthwhile if you expect to accumulate at least $400,000 outside super due to costs involved. Other options such as negative gearing may also allow you to build wealth but this strategy carries more risk as you are taking on debt.
WHY YOU PROBABLY HAVE MORE ROOM IN SUPER THAN YOU REALISE
Let’s crunch some numbers. If you’ve got $500,000 in super, by making the maximum annual $25,000 in concessional contributions and adding an extra $1000 a month in non-concessional contributions over 15 years you get very close to $1.5 million. If you have only 10 years until retirement and the same level of savings, you can still almost double your balance to over $1 million. (These calculations assume total return of 3.5%pa above inflation.)
In a nutshell, super is generally the most tax-effective and the most efficient way to build and hold wealth.