If I had $10,000.00 should I put it into Super (I am 58) or should I put it into a term deposit? I know I would get a better return from super but is it safe? Are there other options?
Sue from Bridgewater, Tas
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Great question, and I get asked similar questions all the time.
Firstly – did you know you can invest in a term deposit inside super? Almost all common investment options that are available to you outside super, are available to you inside super. Therefore “investment risk” or simply put “the risk that you’re going to lose money” doesn’t change based on your money being inside or outside super.
So how do you choose what investment is right for you? A simplified version of our process looks like this:
Investment Time Frame > Risk Appetite > Ownership/Structure
“Investment timeframe” is the amount of time you’re willing to ‘hold’ the investment before making any withdrawals. Do you require your $10k in 3months? Or is it for retirement and you don’t need it for 5 or 10 years?
A low investment time frame requires an investment that is, HIGH in liquidity (your ability to convert your investment back into cash), and LOW in volatility (your investment won’t have large swings in gains or losses. Examples include - Term Deposits, High Interest Savings Account, Bonds or another great one is your mortgage/offset account.
A long timeframe allows you to look at a larger range of investments with LOW Liquidity and HIGH volatility. This means you may get greater returns over the years. Examples include Shares, Property, Investment Bonds etc.
Next, we look at your “Risk Appetite”; or your willingness to LOSE money, for the possibility of MAKING money. Back to your example; you may not need your $10,000 for 5-6 years (long investment timeframe), where someone might advise you to consider shares. However, if you don’t want the value of your investment to drop below $10,000 during those 5-6 years, then maybe the characteristics of shares isn’t for you and your “risk appetite”.
These concepts can be easier to understand visually, the accompanying graph shows a $10,000 comparison between ‘Cash’ and ‘Australian Shares’ from the year 2000.
Lastly, we look at “Ownership & Structure” or ‘who should own the investment?’. In your case, the question is, should you own the investment PERSONALLY, or should you own in inside SUPER.
Owning the investment personally has many benefits, you may feel more in-control, you may have better transparency, and there are no laws around when you can access the money – its all yours!
HOWEVER you will pay tax on any income and capital gains your investment makes based on your personal income tax rate – which can be as high as 45% (+Medicare levies): https://www.ato.gov.au/rates/individual-income-tax-rates/
While returns on the exact same investment, owned by you inside super – you will most likely pay less tax. Roughly speaking 15% while you’re still working, and as low as 0% in retirement.
What is the trade-off for such a great tax rate? Your ability to access the funds. You can only take money out of super once you’ve met a ‘condition of release’.
Due to your age, you may already be eligible, speak to an adviser, or have a look at this great video on the ATO website: https://www.ato.gov.au/Super/Self-managed-super-funds/Paying-benefits/Conditions-of-release/
To sum up – if you have the money ear marked for a holiday or home renovation happening soon, you might want to consider keeping it in your personal name, and look at low risk options.
If this $10,000 is part of a longer-term investment strategy or retirement plan – I encourage you to investigate super further, the potential tax savings can add serious numbers to your bottom line!!!
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