I’m aware of some of the long-term risks around accessing Super early, however my question is: what if I was to use that $10k of super to put toward purchasing a property? It would still leave me with a substantial balance that would continue to grow over the years as I am only 26 years old, and would be an investment toward my property portfolio that would also support my retirement in the future. It's a tricky one and i would really appreciate some advice as this one has been difficult to explore online. Thank you in advance!
Ally in Tweed Heads
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Good question. Given I don’t know your full situation I am focusing on where you have mentioned investing in property being about supporting yourself in retirement. Below I explain why retaining and accumulating monies in super is the best environment to help with this.
It is important to understand that superannuation is one of several tax structures to accumulate wealth in. A property can be owned personally, in super and pension environments. What changes is the tax that applies to the rent and capital gains from this property in each of these structures. The tradeoff of the tax benefits of super is that you cannot access it until you meet a condition of release, so most likely preservation age for you, which is 60.
At your age, withdrawing any of your capital from super now will likely capture the recent market downturn and significantly reduces the benefits to be gained from the 8th wonder of the world for you – compounding. Though this may give you access to $10,000 of your capital now, an investment property is also not a particularly liquid and easily saleable asset.
If you need access to part of your wealth in a property for some reason in future, you cannot simply sell a room of the house. By comparison, you can sell a parcel of shares and not your entire holding if needed. The importance of liquidity varies depending on your situation. Additionally, if borrowings are required for the property purchase, then the level of risk also increases as you now have a debt to service, even if unemployed, injured or ill.
Most overlooked with superannuation is the 15% tax that applies to your investment earnings, which is generally lower than most investors marginal tax rates. If you are earning over $37,000 per annum, you are paying income tax at a rate of 34.5% (32.5% plus 2% medicare levy) on every dollar you earn over that threshold. These marginal tax rates increase further when earning over $90,000pa and again over $180,000pa.
Withdrawing from superannuation to invest in a property in your personal name moves wealth from this concessionally taxed 15% environment to one where you will pay your marginal rate of tax on any net earnings (ie. rent less expenses). Any increase in tax payable is detrimental to your overall investment return and something you need to consider. Basically, the same investment held in your own name compared to via super needs to generate a higher return if your marginal rate of tax is higher than 15%. An added benefit is your super can move into pension phase in retirement, making the tax advantage even greater with 0% tax on earnings (including capital gains).
Upon understanding a client’s situation and goals, I then consider the most appropriate tax structure to invest wealth in. Once this is determined we move onto the types of investments (eg. property, shares, cash or fixed interest).
If you wish to retire before age 60, it is critically important to accumulate wealth outside of the superannuation environment to sustain your lifestyle until you can access your super.
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