In this current climate and while many are withdrawing from their superannuation, would it be a good time to increase your contributions to your superannuation?
Graeme in Melbourne, Vic
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Superannuation is one of the most tax-effective strategies to build wealth to support your retirement. In the current climate due to market volatility, your super balance will fluctuate more than it would under more stable market conditions. However, something to keep in mind is that superannuation is a long-term investment. Due to this reason, you will most likely experience a few market downturns over time and this will impact your super balance.
If you have surplus cash flow adding more funds into super can be a tax-effective, long term strategy to build wealth. However, you will need to look at your individual circumstances to ascertain whether this is the right strategy for you.
How will you contribute to super?
The most tax-effective method of contributing to super is before tax (i.e. concessional contributions). The concessional contribution cap for 2020-2021 is $25,000, this includes super guarantee contributions paid by your employer. If you are increasing your contributions before tax, you will need to ensure that your total contributions (concessional) do not exceed the cap to avoid penalties.
Contributions can also be made with your after-tax money (non-concessional contributions). The non-concessional contributions cap for 2020-2021 is $100,000.
Whether making contributions before or after-tax will depend on your individual cash flow and tax position.
Do you have any non-deductable debt?
Another thing to consider is whether you have any non-deductable debt such as credit cards, personal loans, car loans etc. Paying off these non-deductible debts will have to be considered as well if you have surplus cash flow.
Your home loan is also a non-deductable debt. Therefore, directing some of your cash flow towards super and some towards increasing your mortgage repayments might be something to consider.
When will you retire?
If you are not retiring in the near future, something to keep in mind is accessibility. To access your super, either retirement or another condition of release must be met. Therefore, having a cash buffer for emergencies outside of super is also important.
Building your wealth through super create tax efficiencies. Earnings in the accumulation phase are taxed at 15%. Once you meet eligibility criteria and retire, and drawing a retirement income stream from your super, then the investment earnings are exempt from tax, including capital gains. These tax efficiencies make super an attractive investment vehicle for retirement.
Although superannuation is a long-term investment, this is not a set and forget strategy. You need to ensure that your super is invested in line with your investment style. Look into the asset allocation and underlying investments in your current investment option. Also, look into fees and insurance premiums charged by the fund. Avoid focusing too much on short term returns and look at long term performance instead.
Reviewing your super investments regularly is very important to remain focused on your long-term objectives. It is important to keep in mind that your super investment strategy should be incorporated into your broader financial plan to get the best outcome. Therefore, I recommend speaking to your financial adviser and reviewing your personal financial position, goals and objectives before increasing contributions to get the best outcome.
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