“We have a lump sum approx $100K just sitting in an account not really earning us any interest. Would it be better to sink this into our Super accounts as they are predicted to have great returns at this time?"
- Sandi, in Tanunda, SA
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Thanks so much for your question. It’s one I’ve been asked quite a lot recently given the low interest paid by the banks in the current environment of record low interest rates. On top of that, many of us have been able to save some surplus cash as a result of no overseas (or even interstate) holidays and less going out, perhaps a silver lining of COVID. So, you’re not the only one wondering what to do with that money sitting in your bank account.
Putting extra money into super is certainly one option, but whether this is “better” depends on a number of factors which I’ll touch on below.
The most critical factor that jumps to mind is the length of your investment timeframe and your age. As you may be aware, aside from very limited exceptions, superannuation is intended for your retirement, and you generally can’t access it prior to retirement or reaching the age of 65. So whilst super can be a tax effective way to save for your retirement, it may not be an appropriate option if you need access to those funds earlier. There are some exceptions to this such as the First Home Super Saver Scheme, but this is subject to eligibility criteria and limitations which are probably a topic for another day.
Assuming you wish to invest the funds for your retirement, then you need to consider how you can invest this into super. The most common types of personal super contributions are non-concessional (i.e. after tax) and concessional (i.e. pre-tax) contributions. The limit on non-concessional contributions has recently increased to $110,000 per year. Therefore, assuming you’re below the age of 67, you would be able to put in the $100k as a non-concessional contribution. However, depending on your taxable income you may want to claim some of the $100k contribution as a tax deduction, effectively converting that portion from a non-concessional to a concessional contribution, whilst reducing your personal taxable income by the same amount. In some cases, this can offer significant tax savings, but it is a complex area, and you must be careful not to exceed the concessional contribution caps. I would urge you to get personalised financial advice to determine if this strategy is beneficial to you.
Sandi, you also mentioned that super funds “are predicted to have great returns at this time”. This statement hints at the often misunderstood concept of super fund performance. Many new clients I see ask me similar questions related to performance such as: “Is Hostplus better than CBUS?” This notion of super fund “performance” has come about as a result of the default “MySuper” investment options within industry super funds. Without getting too technical, the problem with this is that no two “MySuper” options are the same so it’s very difficult to compare performance between such default options in Industry Super funds (despite regular media coverage doing exactly that!).
When we think about investment performance generally, the greater risk is rewarded with greater returns (at the cost of greater volatility). Money in the bank is guaranteed so there is virtually no risk, hence the returns are close to zero. On the other extreme, investing in shares is high risk, but historically this has delivered good returns over the long term.
But…. returns are not everything. As an investor, you’re interested in the net return in your pocket (or in your superfund), so any fees and tax implications associated with your investment must also be considered.
So, Sandi, if you walked into my office today and asked me your question, I would need to learn more about your personal circumstances and financial goals to provide you with the best strategic advice. To do so, I would explore the following questions (amongst others):
- How long will you be investing in the funds for?
- How much risk are you willing (and can afford) to take?
- Will you need access to these funds prior to retirement (i.e. invest via super or non-super)?
- How can we achieve the best net performance outcome for you, considering fees and tax implications?
Whilst I can’t give you a direct answer to your question, I hope that gives you some food for thought in relation to your potential investment. When it comes to investing, there is no one-size-fits-all approach as we’re all unique in our circumstances and financial goals. So, my best advice is to seek personalised advice when you’re ready to do so to achieve the best outcome for you.
All the best,
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