Super: Is it better to invest outside of Super?

Have you considered whether to invest your savings inside or outside of your superannuation fund?

Invest in Super

Investors wanting to set themselves up for the future are searching for strategies to reach financial independence. One of the long-term investing strategies raised is whether it’s better to invest inside or outside their superannuation fund. Both options can provide a pathway to financial independence in retirement. I have detailed the pros and cons of investing inside and outside your super fund.

There are many advantages to investing into super and I have listed some of these aspects below:

Pros

• Tax effective rate of 15% on contributions (below Division 293 cap $250,000)
• Diversified investment within your superannuation fund
• Access government co-contribution of $500 for low income earners (under $41,112 in 2021 FY)
• Lower risk of overspending to maintain the current lifestyle
• Save for a home under the First Home Super Saver Scheme (FHSSS)

Concessional Contributions and FHSSS

Contributing to super via salary sacrifice or after-tax contributions can boost your savings for retirement. This can be an effective means to grow the super balance early. Compounded returns in a low tax environment can accelerate the growth of your retirement nest egg over time. The current concessional contributions cap for individuals is $25,000 (in 2021 FY). These concessional contributions to super under the capped amount are taxed at a rate of 15%.

Any unused contributions can be rolled forward up to a maximum of five years. This would depend on your super balance to whether it forms part of the carry forward unused concessional contributions. An advantage is that Individuals could seek to bring forward past cap balances to maximise their contributions. However, careful consideration needs to be taken when investing in super. Non-compliance is financially crippling if not executed correctly. There are strict requirements therefore it would be best to speak to your qualified accountant or financial advisor relating to specific financial products.

I have entered into the First Home Super Saver Scheme to access superannuation to purchase my first home. This scheme allows you to invest up to $15,000 per year or a total of $30,000 across the years. Once you are ready to purchase your house you can voluntarily withdraw up to $30,000 plus the earning on the initial voluntary super contribution. Strict requirements are in place and further information would be found on the state government website.

Invest in Super

Investing in superannuation can provide great tax benefits and a path to setting yourself up for retirement. However, the negative aspects and drawbacks of investing in super must also be considered in order to make an informed decision. I have outlined some of the cons when investing in your super fund:

Cons

• Restrictions on early access to superannuation funds prior to retirement
• Superannuation funds charge fees to manage your investment
• Additional 15% tax on taxable super contributions where Div 293 income and contributions exceed $250,000 (2021 FY)
• Limited tax advantage for those on lower incomes

Div 293 and Tax Considerations

Investing your funds into superannuation requires you to reflect on your personal circumstances. For instance, those on a really high income would need to consider the implications of Div 293 tax. The Div 293 income threshold is currently $250,000. Division 293 tax is charged at 15% of an individual’s taxable super contributions.

Those on lower incomes would also need to weigh up the tax savings that are available to them. Firstly, lower-income earners are in a lower tax bracket. Therefore, this lower tax rate may reduce the tax benefit of investing those funds into super. Secondly, investing in super can also restrict your ability to access these funds until retirement. Thirdly, the need to meet short-term obligations must be an important factor in your decision on where to invest. Paying off a car, making mortgage repayments, or paying school fees would need to be considered before investing in superannuation.

Investing outside of super may be better suited to those seeking a liquid option to access the funds quickly. This would also act as a financial buffer in uncertain times. If unforeseen circumstances arose and you needed to access the funds you could sell the shares. For more information on investing in the share market, I have written a blog here. If you decided to contribute the funds into super you would not be able to access your super until retirement. With either decision you choose, a financial advisor and accountant would be the best person to speak to about your personal circumstances as this information is general in nature.