Should you save in or out of super?

March 7th 2019 | Categories: Financial Planning |

From small numbers to big gains, achieving your savings goals can feel liberating, empowering and assuring. No matter the stage of life you’re in now, you doubtless have considerations to make about what you’re saving for and how you’ll reach those goals. A large part of these decisions is where you’ll put your savings to accumulate.

Broadly speaking, you have two options: Inside super, and outside.

The vast majority (76 per cent) of Australians report ownership of a superannuation fund, according to the Australian Securities and Investments Commission (ASIC), while only 35 per cent claim to hold investments outside of super or their home. While it’s clear superannuation is the most popular form of wealth accumulation – is it the best one?

Invest Blue Certified Financial Planner Anthony Lyons sheds some light on the pros and cons of superannuation, and what Australians should be thinking about at each stage of their life.

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Pros and cons of saving in super

A superannuation fund is a tax-effective means to save for retirement. Money from your employer guarantee, salary sacrifice, the government and/or personal contributions are pooled with that of other members of the same fund, and invested on your behalf in a diversified portfolio by professional investment managers. Superannuation can be an effective way to grow your savings, but there are a number of factors to consider.

Advantages of investing via superannuation

Tax-effective investment environment

“Generally speaking, super is a lower-tax environment than in our personal world,” says Anthony.

Employer guarantee and salary sacrifice payments (concessional contributions) are taxed at a fixed rate of 15 per cent.

This can increase to 30 per cent (Division 293 tax) if your combined income and concessional contributions exceed $250,000 in a financial year, though this will typically still be lower than your marginal tax rate. Low-income earners are paid back up to $500 of the tax paid on their concessional contributions.

Government co-contributions

If you earn less than the higher income threshold ($52,697 for 2018-19), you are entitled to receive contributions from the government according to the total value of non-concessional (after-tax) contributions you make in that financial year, helping to grow your savings faster.

Strict access regulations

Over half of Australians surveyed by ASIC claim they used money from their savings to handle unexpected bills. While this can be important for financial resilience, it does set your personal savings back. With superannuation, you have enforced restraints on how you can access savings, meaning fewer setbacks to your retirement goals.

That said, some of your super may be released on compassionate grounds in extreme circumstances.

First Home Super Saver Scheme

First home buyers have the option to use their superannuation to grow their deposit in a low-tax environment. You can withdraw up to $30,000 of voluntary concessional and non-concessional contributions made after July 1 2017, and will also receive that money’s associated earnings. You can only do this to purchase a first home and must meet strict eligibility criteria.

Managed investments and pooled resources

In a superannuation fund, your investments are carefully managed by a team of experts. This means the hard work of diversifying and managing risk isn’t for you to worry about. You’ll also benefit from the pooled resources of other fund members, enabling your super fund managers to make investments for you that would be impossible for an individual.

Disadvantages of investing via superannuation

Strict access regulations

“The downside of investing in super is that it does tie your money up,” says Anthony. “The further you are from retirement, the longer you’ll have to wait to use the money in your super.”

While limited access can be a good thing, it’s not always right for your situation. You cannot use money invested via super for personal enjoyment or family goals, such as paying for your children’s private education.

For this reason, you probably would not want to invest via super in order to meet short-term savings goals, besides a first home deposit.

Fees

There can be a lot of fees associated with your super fund that negate some of the tax benefits. It’s important to look at the fees your super charges you, as well as risk, returns and services, to determine if you could be getting a better deal. Switching to a fund with lower costs and similar investments can save you significant amounts by way of compounding.

When should you invest in superannuation?

When thinking about your investments and savings, it’s important to consider your complete financial situation, goals and obstacles – not just your age. Speak with a certified financial planner to determine the best investments for you.

That said, there are certain times in life you might be more likely to think about your investments.

Starting work

When you start work for the first time or reenter the workforce, you’ll need to think about your super contributions. By law, your employer will contribute the minimum super guarantee amount to help you grow your super.

You’ll also have the option to commit to salary sacrifice, wherein a percentage of your pay is automatically contributed to your super.

It’s a great idea to make the most of this as early as possible so you can reap the benefits of compound interest. That said, low-income earners may prefer to have that money in their pocket, or find it more tax effective left outside super.

Approaching retirement

“Generally speaking, people in their 20s and 30s are saving for personal things – the car, the house, the travel, the kids,” explained Anthony. “It’s not until their 40s and 50s that most people realise they’re nearing retirement and need to focus on putting money in their super.”

As you enter your 50s and start to think seriously about retirement, you need to check the health of your super balance. At this point, your retirement is nearing and you need to seize every opportunity to ensure your super balance will help meet your retirement goals. This may mean moving non-super investments or returns into the super environment.

A financial planner will help you grow your super in limited time – meaning you can enjoy more tax-free income in your retirement.

Are super benefits available to you?

Staying aware of the concessions, deductions and benefits available to you is a clever way to stay on top of your super and ensure a comfortable retirement. Some of these concessions include:

• Low-income superannuation tax offset.
• Government co-contributions.
• Spouse contribution splitting and tax deductions.
• Carry-forward concessional and non-concessional contributions caps.

Your access to these various benefits will change according to your super balance, income and spousal situation – and many require action on your part to optimise. If these options are available to you, it’s a good idea to consider if they fit into your financial plan.

Anthony states that one of the most common traps he sees people fall into is not looking at their super at all while they’re younger and making the most of the opportunities available to them.

“People aren’t looking at what insurance they’ve got, what fees they’re paying and what investments they’re in. Whether it’s just too hard, they don’t understand or they aren’t interested – a lot of people could benefit from overcoming any apathy around their super and checking it’s performing well for their needs and they’re making the most of contributions.”

When should you save outside of superannuation?

The restrictions around super mean there are times you’ll want to put your savings elsewhere. Ask yourself these questions to determine if you should be saving outside super:

What are your short-term goals?

“There’s always a trade-off,” says Anthony. “Do you want to have a good life now, or in retirement? The truth probably lies somewhere in the middle.”

Your financial plan needs to reflect your current situation, as well as both your short and long-term goals. While saving for retirement is very important, there are goals you’ll need to meet in the short term that are equally so. Investments outside of super, including savings accounts, may be more suitable for reaching these goals.

For example, you might have your sights set on a new car, a big overseas holiday or your dream home. Don’t ignore what you want from life now in the name of retirement. Weigh up what you can afford to enjoy today versus what you need to set aside for retirement.

However, if you feel your super isn’t helping you meet your retirement goals, Anthony warns against neglecting your super in favour of other investments.

“Super is just the vehicle – how it performs depends on what you’ve got it invested in.” There are countless options available for who your super is kept with and what it’s invested in. You have the power to move to alternative super providers to ensure your investment goals are being reached.

While you might like to adopt additional investments to further diversify, it’s important to seek professional advice to ensure this will help you meet your goals.

Do you have a financial buffer?

You need a financial buffer to remain resilient when the going gets tough. Ideally, this is a liquid balance you can tap into quickly and easily. Super is clearly not the environment for your financial buffer, but not all investments outside super will be either.

It’s a good idea to build a financial buffer in a savings account to protect yourself and ensure you’re not exposing your safety money to too much risk.

Do you have the cash flow?

Finally, can you afford to save? Your super is supported by your employer’s contributions at the bare minimum, but any investments outside of super must come from your own pocket.

If you’d like to start saving, consider renegotiating your expenses to ensure you can afford to invest while continuing to live the lifestyle you choose.

At the end of the day, where you put your savings comes down to more than just how old you are. It’s about you – your goals, circumstances and advantages. There’s no cut and dry answer to where your savings should go without assessing your situation and where you want to be.

Furthermore, super is always changing.

“It’s hard for the average layman to stay across the different rules around super and other investments,” says Anthony. “There are a lot of incidental things that can change so unless you’re completely tuned in, compliance and optimisation can easily become a lost opportunity.”

Don’t miss out on a fulfilling retirement. For hands-on, personalised financial planning assistance, reach out to Invest Blue today.

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What you need to know

This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.  https://www.apa.org/pubs/highlights/peeps/issue-105.aspx  https://www.behavioraleconomics.com/resources/introduction-behavioral-economics/