Superannuation is a topic that affects every single working Australian. It’s one of the biggest financial assets people hold, but how much thought have you given to your super lately?
Stats show that a whopping 43 per cent of us aren’t taking our super seriously. Many of us are even making some super big mistakes.
“People just bury their head in the sand when it comes to their super,” says Ben Nash from Pivot Wealth. “We know that it’s important, but it ends up in the too hard basket. Life gets in the way and all that time we’ve missed the opportunities to take action.”
As Nash points out, your super isn’t something that needs a lot of attention, but you do need to get it right. Any changes you make now can have a huge impact on your wealth after you retire. If you want to improve your wealth and quality of life, you need to supercharge your super.
WATCH: Ben Nash and Kochie talk all things super.
Don’t overlook the tax advantages
If you’re wondering why you might want to supercharge your super instead of boosting other investments, Nash advises you start with the tax advantages.
“Once money is inside super it’s taxed at a much lower rate than our personal income or investment income outside of our superannuation,” he points out. “And then you’ve got the fact that you can get tax deductions on the contributions into super as well. It means that you can use super as a tool to really accelerate your wealth creation.”
You can also make super contributions into a lower income earning spouse’s super fund, giving you a tax offset. If your both eligible, for the scheme, you can generally make a contribution to your spouse’s super fund and claim an 18% tax offset on up to $3,000 through your tax return. Check the details here.
Funds are locked in
One thing to keep in mind, however, is that once you put your money into super, you usually can’t get access to the funds before your retirement or preservation age (unless you qualify for early access – recently COVID assistance was allowed as one such reason, buying your first home might be another). Super offers a way to invest in your future security, but how far into the future are you looking? Can you afford to lock away your savings for years, if not decades?
So, before you start piling your money into your super, it’s worth building up an emergency fund that will be there for short-term emergencies. Generally it’s agreed that $2K is the minimum required in such a fund, but more is better. Another rule of thumb is to have at least three months salary tucked away for rainy days. That’s considerably more than $2K for most people.
Another thing to consider is whether to better to put extra money into your super or smash your mortgage faster. There are many factors that influence this decision, but the current low rates on home loans and high returns on super funds is definitely one of them. Right now, investing in your super is probably putting your money to better use than paying off your mortgage.
Each dollar going into your mortgage is from ‘after-tax’ dollars, whereas contributions into your super can be made in ‘pre-tax’ dollars. Pre-tax contributions (capped at $25,000 annually) are taxed at 15% for most Australians (30% if you earn over $250,000 per year). That’s a substantially lower rate than the higher ranges of income tax. So putting your savings into your super can significantly reduce your tax bill. That’s not something your mortgage can offer you.
There are a few other considerations before you supercharge your super before your mortgage. It’s best to talk to your financial adviser to make the right decision for you.
Time to supercharge your super
You’ve got your emergency fund in place and you’ve sorted out the mortgage question. Now it’s time to start putting your money into your super. Here are some extra tips to help with that.
1. Choose the right fund
Probably your most important decision to supercharge your super is putting it into the right fund. It’s tempting to just tick the box and go with whatever fund your work is signed up to, but this might not be the best option. The trouble is, the options can be really overwhelming.
“It really comes down to the investments you want to be having in your fund first,” says Nash. “That can be a good way that people can narrow down the options that are available them.”
Nash makes the example of people who might want to invest in a socially responsible way. This instantly narrows your focus and limits the funds you can choose from. Other examples he gives are funds with passive index funds options or even interesting investment options. “Set your investment philosophy or mandate as the first step, and then look for a fund that can deliver that mandate in a way that has a good user experience, but also competitive fees in the segment that you’re playing in with your investments,” says Nash.
2. Watch the fees
Most super funds charge annual fees (check the comparison websites above to see who charges what). This money is paid directly out of your super account and the amount you pay can really make a difference to your balance come access time.
Make sure you take fees into account when you’re comparing super funds. It’s not just about the five or ten year return (and certainly not about the one year return). You should also make sure you’re only paying one set of fees. It makes zero sense to have more than one super account, so consolidate into one.
3. Find your lost super
This is probably the easiest way to supercharge your super of them all. Many Australians have super tucked away in accounts they’ve forgotten exist. In fact, there’s estimated to be almost $14 billion in lost super out there, in over 2.2 million super accounts. If you’ve changed jobs over the years, some of that money could be yours.
You can find out if you have lost super here. You can then roll your lost super into your chosen super account, increasing the balance.
4. Tap into government benefits
The Australian government encourage different superannuation contribution strategies. These incentives vary from tax incentives (see above) to dollar matching. Three that might be suitable for you are:
First home buyers – the first home super savers scheme allows you to save money for your first home inside your super fund. This allows first home buyers to salary sacrifice volunteer contributions up to $30,000 into their super that are taxed at the lower super rate. The money is then released by your super fund when you are ready to buy your first home. There are some caveats attached to this scheme, so do check with your financial adviser to make sure it’s right for you.
Concessional contributions – you can contribute up to $25,000 pre-tax dollars (this includes money contributed by your employer and is soon to be increased to $27,000). “That can be a really good way to get some good tax deductions and get money into your super in a way that you don’t feel as much out of pocket,” says Nash.
Super co-contribution – if you’re a low to middle income earner and make personal (after tax) contributions to your super fund, the government will make a contribution up to $500. The amount the government will kick in depends on how much you contribute and how much you earn. You can find out more here.
5. Make direct contributions
As well as making pre-tax contributions from your salary, you can also make after tax contributions from your bank account. You can then claim this money as a deduction at tax time.
“In my view, it’s a bit more of a flexible way to put money into your super,” says Nash. “You can look at what happens at the end of the financial year, see what’s the really optimal amount to contribute, and then put that amount on money in.”
6. Up your risk
Don’t rely on the ‘default’ investment option for your super scheme. Unless you tell them otherwise, most super funds will sit you in a balanced, or even conservative, investment mix that aims to reduce risk. While these options offer lower risk, the also offer lower returns over the long term.
If you’re 10 years or more off retiring, it makes sense to go for a high growth strategy. You’ve got time to ride out short term market fluctuations and take advantage of the higher returns a more risky strategy brings. You can always choose a more conservative approach as you near retirement.
Remember that you can also split your super across different investment strategies. You might opt for putting a certain percentage of your money onto a high growth track and the rest into a balanced strategy. Talk to your financial adviser and super fund to see what works best for you.
This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.