Whether you have come into a lump sum of money or perhaps have some extra money from your regular salary to save, it may pay to take a fresh look at Superannuation as a way to grow your wealth.
A lack of understanding of superannuation often causes investors to ignore this powerful wealth creation vehicle in favour of buying investments directly. Often this can be a mistake.
Superannuation should not be viewed as an investment itself. Superannuation is actually a type of trust (or a special type of legal entity) in which many different types of investments can be purchased. These assets may be cash accounts, term deposit, bonds and fixed interest, managed funds, shares, property investments, and many other permitted investments.
With many of the common Superannuation funds available the trustees of the funds take most of the responsibility for choosing the underlying investments but this does not need to be the case. It is possible for Superannuation investors to have significant input into the choice of assets in their fund.
There are some great benefits in investing within the Superannuation environment including;
Taxation rates on earnings of between 0% and 15% for most investors on income and capital gains. This can be a big discount to rates paid by Salary and Wage earners of up to 46.5% on their earnings.Tax deductions can often be claimed for contributions to Superannuation if self employed or salary sacrificing as an employee.Centrelink may ignore Superannuation money for the assets test when calculating benefits.Provides some protection from creditors on bankruptcyPossibly greater control of estate planning where a will is at risk of being challenged.
Case Study:
Imagine John a 55 year old who wants to invest $50,000 in a share portfolio. John earns $82,000 per annum and his chosen shares pay dividends of $2,500 per annum fully franked. If John buys his shares in a Superannuation fund (in Pension phase) he will pay no tax on his dividends. In fact the Tax office will send John’s superannuation fund a cheque for $1,072.42 after it lodges its annual returns (refunded imputation credits). Conversely if John buys the shares in his own name he will likely pay $303.57 extra tax on his earnings and be $1,375p.a worse off than if he had bought his shares using a Superannuation fund*.
There are three major categories of superannuation funds.
These are Industry funds, Retail funds, and Self-Managed funds. All of these have different advantages and disadvantages. When choosing a fund some major considerations are; value for money for features likely to be used, flexibility as your circumstance change, investment options, estate planning features (e.g can you direct your benefit where you want it to go on death), quality of insurance provided and service standards (are they easy to deal with).
*Assuming John’s employer deducted the correct amount of tax on his Salary and using 2013/2014 ATO published taxation rates of 30% for companies, and ignoring the impact of fees and brokerage.
