"Should I invest my surplus cashflow in super deductible contributions? I'm a 30 year old self-employed female and I don't plan on having children. Are there better options to invest and still get tax breaks? I'm concerned about having this money tied up until retirement."
- Question from Bella in Caloundra, QLD
Top answer provided by:
Bryan Graham
Hi Bella,
Thank you for such a great question. We regularly get asked this type of question and unfortunately it is a very hard one to answer.
There are many variables associated with superannuation contributions, long-term retirement planning, and the alternatives to superannuation.
One of the most important things to understand when discussing superannuation and comparing it to alternatives is to recognise that the superannuation system is a concessionary tax long-term investment structure. Funds that you invest in superannuation may attract tax deductions on the contributions and concessional tax treatment on the earnings which can compound over many years.
If you invested in the exact same assets in your personal name or in the superannuation fund, you would expect the superannuation fund to outperform the assets in your own name over the long run.
The incentives available through superannuation need to be balanced out by the opportunity costs that are present as well. Superannuation is a long-term investment designed to provide for retirement. Any funds contributed to superannuation are retained until you reach your preservation age. The earliest access is age 60, if you also meet a condition of release, otherwise access will be available from age 65.
You also asked if there were better options to invest and still get tax breaks. There are a whole range of options available which may provide some tax breaks. It is important to consider any investment in total rather than focusing on just one element.
Being self-employed, you may also be eligible for incentives within your business as part of the COVID-19 response. It may be worthwhile investigating these with your accountant.
Types of superannuation contributions
It is also important to understand how you can make contributions to superannuation funds. There are two forms of contribution, the first being a concessional contribution which is a contribution from an employer, self-employed person or individual for which a tax deduction is claimed for the value of the contribution. These contributions will be taxed at 15% within the superannuation fund. The concessional contribution cap for the current financial year is $27,500.
You can also make a non-concessional superannuation contribution. A non-concessional contribution is made with after-tax funds and no tax is deducted from the contribution when received by the superannuation fund. The non-concessional contribution cap this financial year is $110,000 and there are provisions to bring forward up to 3 years’ worth of this contribution in one transaction.
Superannuation contribution strategies
For most people, superannuation contributions are made periodically throughout the year. It is also possible to make lump sum contributions either during or towards the end of each financial year.
As you are self-employed and make superannuation contributions for yourself, it may be worth considering making contributions above the minimum level using part of your surplus income to build funds for retirement.
Without a better understanding of your current situation it is impossible to quantify what those contributions should be. As an example if you have a very high income you may look to maximise your contributions up to the concessional cap to maximise the tax concessions available.
What to think about before making contributions
It may be worth considering the following questions before committing to additional superannuation contributions.
- Do you have a cash reserve or buffer in case of emergencies?
- How consistent and stable is your employment income?
- Do you currently have a home or are you saving a deposit?
- How will these contributions affect your ability to pay off a mortgage or get into the property market?
- Will locking funds away limit your ability to take advantage of opportunities in the future?
- Can you invest in your business/self-employment and receive a greater return by being active with these funds?
Other things to consider before investing in superannuation
Insurance
-You may already hold some insurance within your superannuation and that can be a very effective strategy.
-Contributions made to cover the insurance premiums form part of your contribution caps.
Concessional contribution catch up
-If your superannuation balance is under $500,000 you may be able to access the concessional contribution catch up. This would allow you to make concessional contributions to catch up on unused amounts of the cap from previous financial years.
Small business superannuation concessions
-Being self-employed you may be eligible to access the small business CGT concessions in the future. This may present an opportunity to make a significant lump sum contribution to superannuation when you retire.
Superannuation balance transfer
-There is a cap on the amount of superannuation that can be transferred into a retirement income stream. At present this cap is $1.7 million and is indexed in line with inflation.
-Depending on current balance and the potential you have to build your superannuation overtime this may need to become a consideration in your planning.
There are many considerations when answering your question. I would be confident that you could develop a strategy in conjunction with an adviser to build your wealth over time.
I would welcome the opportunity to assist you to do so in the future.
All the best,
Bryan
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