The decision to invest more inside your super or outside is one almost every Australian investor will face at some point in their investing journey.
Superannuation offers generous tax benefits designed to help Australians build wealth over the long term for retirement. And it’s safe to say it’s been working pretty well so far: superannuation is forecast to hold $4.3 trillion worth of assets by 2031 which would make it the second largest retirement savings pool in the world.
That’s punching well above its weight for a nation that doesn’t even crack the top 50 by population or top 10 by GDP globally.
On the other hand, investments held outside super can complement your retirement savings by giving you another pool of money that can be accessed whenever needed, giving a lot more flexibility in case of a rainy day, while super is generally locked away until at least age 60.
So, where should those next hard-earned investment dollars go? The answer largely comes down to three things: tax, time and access.
Why put more money into super?
The biggest advantage of investing through super is that you can potentially pay less tax.
A concessional contribution is money paid into your super before it has been taxed as income. This includes your employer’s compulsory 12% super payments and any extra money you ask your employer to contribute through salary sacrifice.
These contributions are generally taxed at 15% when they enter your super fund. For many Australians, that is considerably lower than the tax they would pay if they took the money as income and invested it outside super.
Take someone earning $80,000 a year who wants to invest 5% of their salary, or $4,000.
If they take that money as income and invest it outside super, the 30% marginal income tax rate and 2% Medicare levy would leave them with around $2,720 to invest. If they salary sacrifice the same $4,000 into super, the 15% contributions tax would leave them with $3,400 invested.
That’s an extra $680 invested every year.
To see how that could add up, assume both amounts earn 7% a year for 25 years. For simplicity, we will ignore fees and tax on investment earnings. The annual contributions made through super would grow to around $215,000, compared with roughly $172,000 outside super. A difference of about $43,000 from putting money into super as opposed to outside of super. Actual outcomes will depend on factors such as investment returns, tax circumstances, fees, changes to legislation and individual circumstances.
And that example only captures the tax paid before the money is invested. Investment earnings inside a super accumulation account are also taxed at up to 15%, which may be lower than the tax paid on investment income outside super. The usual contribution caps and eligibility rules still apply but, for money intended for retirement, super can be hard to beat.
Super is also not always quite as locked away as it first appears.
Under the First Home Super Saver scheme, eligible first-home buyers can make voluntary contributions through super and later withdraw an eligible amount, plus associated earnings, to put towards a deposit. Up to $15,000 of contributions made in any financial year can count towards the scheme, up to $50,000 in total.
You cannot dip into the compulsory contributions made by your employer, but the scheme can make super a more flexible option for anyone already saving for their first home.
Why invest outside super?
The main advantage of investing outside super is flexibility.
For most Australians, super can generally be accessed from age 60 if they have retired or left a job, or from age 65 whether they are still working or not. If you are in your 30s or 40s, that can leave your money locked away for several decades.
An investment portfolio outside super doesn’t come with the same restrictions. You can generally sell your investments and access the money whenever you choose. That flexibility can be valuable if you’re investing for a goal that may arrive before retirement. You might want to take a career break, start a business, pay for your children’s education or retire before you can access your super.
Betashares Direct is a simple way to build an investment portfolio. You can choose your own ETFs and shares, invest regularly or use a professionally constructed portfolio, depending on how you want to invest. It can also give you more room to change your plans. Money that was originally invested for the long term could eventually be redirected towards a different goal if your circumstances change.
Of course, having access to an investment doesn’t mean its value will be stable when you need it. Money required within the next few years may be better suited to cash or another lower-risk option than shares. But for longer-term goals that still fall before retirement, investing outside super can provide a useful balance between growth and flexibility.
You may pay more tax along the way, but that doesn’t automatically make it the wrong choice. You are giving up some of super’s tax advantages in exchange for the ability to use your money earlier.
The choice to put more money towards your super or investments outside super will change as your income, goals and timeframe change. But knowing the benefits and drawbacks of each option is important before making that decision.
So, what should you do next?
Think about when you might need the money. Super may suit long-term retirement savings, while investments outside super offer more flexibility for earlier goals.
You don’t have to choose one or the other. Before deciding, consider your timeframe, how much access you want to keep and how much additional contributions you can make within your concessional contributions cap. The right choice may be a combination of both.