ARTICLE

Want to pay less tax? Invest more in super

05 August 2022 dot 3 mins read

Concerned about how rising costs could affect your savings potential? Investing in superannuation lets you grow your wealth while generally paying less tax on it.

Inflation, rising interest rates and a higher cost of living have combined to put a firm strain on Australians’ hip pockets. Investing in shares, exchange-traded funds (ETFs) or real estate are all ways to combat these pressures and potentially grow wealth, but super is often overlooked as a ‘boring’ investment channel.
 
Yet while retirement might seem too far away to put any real effort into growing your super, its attractive tax structure means it could be the best investment you’ll ever make.

Here’s why.

From Gen Z to pre-retirees

Particularly in the current economic climate, it’s easy for younger people to dismiss the long-range benefits of super in favour of holding what cash they have in a basic savings account. But this lack of focus on their future could ultimately result in tens – or even hundreds – of thousands of dollars in potential super earnings being lost over their lifetime.
 
“One of the biggest risks for young people is disengagement because they tend to undervalue their superannuation,” says Victoria Short, Senior Financial Planner at AIA Financial Wellbeing.
“As advisers, we find that lack of engagement often relates to a lack of understanding or appreciation of super’s true purpose.”

Contributions from the super guarantee, which increased to 10.5 per cent of your salary from 1 July 2022, are effectively forced savings.

Younger Australians may feel that because their money is being kept from them anyway, it would be pointless to add even more to their super. Victoria says that rising inflation and housing prices, as well as increasing borrowing costs, adds to that resentment of having their hard-earned money stored away for decades.

“Contrast that with pre-retirees who are trying to catch up on their superannuation contributions to make sure they’re setting themselves up for a comfortable retirement,” she says. “When I have conversations with pre-retirees, most of the time they’ll say, ‘We wish we’d started sooner.’ There’s a lot of regret for the older generation and a lot of disengagement for the younger generation.”

Education is critical to overcome these concerns, Victoria says. Once you understand the true purpose of your super – and its highly attractive tax structure – it just makes good sense to put more into it if you can afford to do so.

“And the younger you are when you start,” she adds, “the better the outcome is likely to be.”

A much more attractive tax structure

Before explaining how your super can help you save on tax, it’s important to clarify the difference between concessional and non-concessional contributions.
 
  • Concessional: contributions made to your super by you or your employer. Every financial year, you can make concessional contributions of up to $27,500.
  • Non-concessional: contributions made by you from your after-tax earnings (there are also other non-concessional contributions, like spousal contributions).
Concessional super contributions are generally taxed at just 15 per cent, which is less than even the lowest income tax bracket (19 per cent for anyone earning more than $18,000 per annum). And if you are on a much higher wage, you’ll pay much more income tax (up to 45 per cent on earnings over $180,000 per annum). So with a salary-sacrifice arrangement, for example, you can reduce how much tax you pay from your salary and really start to grow your super.

On top of this tax saving, also consider the power of compound interest – the interest you earn on top of existing interest – to seriously boost your savings over the long term.

Even if you are only contributing a small amount extra into your super, if your fund delivers a good rate of return, then because of compound interest your super amount will be far higher than someone who only relies on the super guarantee for contributions. While past performance is no indicator of future success, the median return of growth funds in 2021 was 13.4 per cent1.

“You can use strategies like bring-forward concessional contributions,” Victoria explains. “This allows you to make up the contributions you didn’t make in previous years.

Let’s say that you decide to take a couple of years off to raise children or travel the world, so you don’t make much in the way of contributions. When you return to work, you’ve got great cash flow and the ability to make extra contributions. However, your employer contributions may not provide much space to make additional, concessional contributions. With bring-forward concessional contributions, you’ll not only grow your super more, but also make the most of associated tax benefits.”

Growing your wealth starts today

Whether you’re just entering the workforce, raising a family, paying off a mortgage, or looking ahead to retirement – there’s no better time to be proactive about your super than right now.
 
“It really doesn't matter how young you are or how little surplus cash flow you have – what a lot of people forget is that super contributions are still your money, regardless of when you can access them. So you really need to make the most of today and get your superannuation going,” says Victoria.

“There are some great websites, like Moneysmart, that provide useful information on super – on how to invest. They also have calculators that can indicate what you could earn based on any investment decisions you make today. Overall, it’s most important to get some financial advice about your super and your future.”

Want to know more about how you can get more out of your super and use it to maximise your wealth? Talk to an AIA financial planner today.
 
Footnotes
1 https://www.chantwest.com.au/resources/super-members-patience-rewarded-with-10-straight-gains/
Disclaimer:
Copyright © 2022 AIA Financial Services Pty Limited (ABN 68 008 540 252, AFSL 231109), trading as AIA Financial Wellbeing. All rights reserved. This information is current at the date of this publication and is subject to change. This provides general information only, without taking into account factors like the objectives, financial situation, needs or personal circumstances of any individual and is not intended to be financial, legal, tax, health, medical, nutritional or other advice. Before acting on the information in this publication, individuals should consider its appropriateness having regard to such factors.

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