You don’t have to think of your superannuation fund as passive. In fact, being proactive with how your super is invested can influence its outcome when you’ll need it the most.
When investing in super, it’s best not to think about your activities as just ‘saving’. That implies setting aside money that you will retrieve at a later date for use that will be around the same amount. Investing means that money or assets will be worth more at a later date that will outpace the cost of living.
What Is Investing Though Super?
Superannuation is a legal structure, like a trust, that is designed to hold your investments in a way the government treats more favourably for tax purposes than money left outside of superannuation. The money invested through superannuation funds are pooled to buy and hold assets which reap a profit in two ways:
- Growth in resale value (capital growth)
- Provide an income through rent or dividends
There are four classes of primary assets: shares, property, fixed interest and cash.
Shares
Shares (or stocks) represent part ownership of a business. The more profitable the business is, the higher the value of the share. A share is a way to trade an ownership stake in a business with other people. These may be Australian or international.
Property
Property is a growth asset and usually relates to office space, hotels, retail shopping centres, factories etc. Property can be listed or unlisted.
Both shares and property are growth assets as they are to produce high returns over long period of time. They may be high risk because of potential volatility.
Fixed Interest
This is a type of investment that offers a set rate of interest for a specified time period. This covers a broad range of investments with varying degrees of risk, such as term deposits, government bonds, corporate bonds, capital notes, debentures and income securities. At the end of the fixed term, the loan is paid back in full.
Cash
Cash is used for short-term deposits and cash management trusts. Both fixed interest and cash are known as defensive assets because they offer investors a lower risk, however the trade off is lower growth assets than shares or property.
Long Term Investment
Most superannuation funds mature to fund retirement because of the time they are invested. Investments grow and fail when markets decline, however when they recover they recoup and increase their value. The longer investments have to grow and recover, the more investors are likely to ride out volatility.
Pro Super Tip: Diversifying into more defensive assets can be crucial in the last five to ten years of accessing your super.
Compounding Returns
The longer assets are invested, the more they can compound. The returns are calculated on the growth derived each year.
Tax Benefits Of Superannuation
Money paid into superannuation accounts such as amounts paid by an employer and salary-sacrificed contributions (concessional contributions) are taxed at 15%. There are some exceptions to the rule:
- If you earn $37,000 or less, the tax is paid back into your super account through the low-income super tax offset (LISTO)
- If your income and super contributions combined are more than $250,000, you’ll pay an extra 15%
- Contributions paid through your after-tax income (non-concessional contributions) are not subject to contribution tax
- Earnings on investments within your super fund are taxed at 15% including interest and dividends less any tax deduction or credits
Pro Super Tip: Avoid paying extra tax on our super and give your super fund your tax file number.
Withdrawals
The amount of tax you pay will depend on whether your withdraw money from a super income streams or a lump sum.
You’ll be able to withdraw your money in small regular payments which is known as a super income stream. If you’re aged over 60, this income is usually tax free. If you’re under 60, you may have to pay tax on this income stream.
Pro Super Tip: As everyone’s situation is different, it pays to seek the advice of a professional who can guide you to the best way to access money on your superannuation fund.
If you’re aged over 60 you don’t pay tax when you withdraw a lump sum from a taxed super fund, however you may pay tax if you withdraw from an untaxed super fund (public sector fund). If you’re aged under 60 and want to withdraw a lump sum from your super, you won’t pay tax if you withdraw up to the low rate threshold, which is currently $205,000. If you withdraw an amount over the threshold, you’ll be obligated to pay 17% tax including the Medicare levy, or your marginal tax rate (whichever is lower).
If you haven’t reached your preservation age, you’ll be obligated to pay 22% tax including the Medicare levy or your marginal tax rate, whichever is lower.
If you’ve never taken control of your super, you’ll automatically be placed in a default investment option which is usually made up of a diversified mix of assets that will give you exposure to a good range of investment options. These assets may be shifted from when you’re younger to less risky growth assets as you get older.
Pro Super Tip: You can check your annual statement to find out which investment option you are currently in.
Superannuation funds normally offer a range of investment options where you can create an investment strategy of your own. Most super funds will also give you freedom to move all or some of your existing accountant balance (known as switching) into different investment options.
Your super fund will probably have tools to help you in the form of risk profile questionnaires, however because this is a major decision, the advice of a professional is paramount. You’ll be able to speak to someone about what’s possible and which service you can access at no extra charge.
Some finds require more scrutiny than others and may have higher fees than other options. Hiring a professional to look after your superannuation is a tax deductible cost that can be claimed when you lodge your personal income tax return.
ITP Tax Accounts don’t ‘just do tax’. They offer a range of financial advice from income protection insurance, estate planning and retirement planning. Phone 1800 367 487 and chat with a friendly professional today.