Should I in­vest inside or out­side my super fund?

Money Magazine Australia - - COVER STORY -

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!


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.


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.


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.


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.

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