Should I invest more inside OR outside of my super?

Bryce: [00:00:26] Welcome to Get Started Investing feed, a podcast where we attempt to answer the most common money and investing questions from the community to help us become better investors. If you're joining us for the first time, welcome, We strongly recommend that you scroll up and start at episode one. Now, while we are licensed, we are not aware of your personal circumstances. All info on this show is for education and entertainment purposes. Any advice is general advice only. My name is Bryce and as always, I'm joined by my Equity buddy Ren. How are you? 

Alec: [00:00:59] I'm very good. Bryce excited for this episode. We are talking investing inside or outside of your superannuation account. 

Bryce: [00:01:07] Yeah, superannuation has been in the news of recent times here in Australia. The Government is playing with some of the tax rules around it for those with big, big superannuation balances, Yes, but we don't need it to. 

Alec: [00:01:20] Those with big superannuation balances are still getting a tax advantage, just not as much of a tax advantage. Some may say that storm in a take up. Big Nothing burger. Some may say.

Bryce: [00:01:34] But one of the questions that we often get from the community around superannuation is should I invest inside superannuation or should I invest outside of superannuation? In other words, contributing more to super? Is it worth it? 

Alec: [00:01:50] Yeah, yeah. 

Bryce: [00:01:51] And we're going to attempt to answer that today by talking about some of the pros and cons for contributing more to superannuation. We'll go through a worked example to give you an idea of actually how it nets out and then have a chat about how we approach our superannuation at the end. 

Alec: [00:02:06] Now let's be very clear from the outset, if the choice is contributing more to super or taking that cash and spending it on whatever you're going to spend it on. The answer is a clear yes. 

Bryce: [00:02:17] Yes, yes.

Alec: [00:02:18] Yes. You should contribute more to super. If the alternative is you're just going to spend that money on stuff that you don't need. Super is great because it like it is just automatic, it's disciplined, it's out of sight and it's long term. But the question really here is for those who are going to invest that money in themselves, is it worth contributing more to super or taking that money and investing it yourself? There's a key question here that really frames the answer to this question said question a lot, that. 

Bryce: [00:02:50] It is, how long do you want to remain employed? 

Alec: [00:02:53] Yeah. Do you want to remain employed until you can access your superannuation account? If the answer to that is yes, then contributing more to your super makes sense. If you want to be able to stop working before the super preservation age, before you can access your super, then it makes sense to be building part of your nest egg outside of the super. So Bryce what age do we access our super currently? 

Bryce: [00:03:20] Ren, You cannot access your super until you are 65 years old. 

Alec: [00:03:25] Do we think that's going to stay at 65? 

Bryce: [00:03:27] Absolutely not. That's obviously just conjecture, complete conjecture. 

Alec: [00:03:32] But I mean, if history is any indication, yes, the government have never lowered the super preservation age, but they've certainly raised. 

Bryce: [00:03:42] Given that you can't touch your superannuation until 65. And for most people that's the superannuation component of their overall assets and their house is the largest asset that will generate income for you when you're in retirement. If you want to be retiring at 45 or taking a step back from work and working part time and getting money from your investments in other ways, that's where you need to consider investing outside of superannuation and building a nest egg in forms that become a little bit more accessible than superannuation because you can't hit it until you're 65 years old. 

Alec: [00:04:18] We're talking about superannuation, which is Australia and the preservation age of 65. But for people listening outside of Australia, this is a relevant conversation really wherever you are in the US, for one case, the age that you can access it 59 and a half in the UK, Lifetime Isa is 60 years old in Canada. Brutal for our Canadian listeners. RR Airspace, you have to be 71 to access it. And then over the ditch in New Zealand, if you have a KiwiSaver account, you have to be 65. And so this is just a feature of retirement systems around the world that there's a preservation age or an age that you can access it. And so this question is relevant everywhere. Do you invest in the tax advantaged environment but you can't access your money until a certain age? Or do you pay full tax and then invest outside of that environment? 

Bryce: [00:05:11] Yeah, well, let's move to arguments for contributing more to super. And because the number one advantage that you've mentioned there a couple of times is the tax benefits and you'll hear a lot of people talk about it, particularly as they get closer to the retirement age. You hear a lot about the tax benefits. So that is the first argument. A contributing to super. 

Alec: [00:05:31] And people often talk about the tax benefits, But you've actually done a worked example in our notes here. So talk us through it. Make it really practical. Like how much tax would be saving? What's the benefit? 

Bryce: [00:05:43] So contributions to your super are taxed at a different rate and they're taxed at 15% rather than your marginal tax rate for your income. So let's say that you earn $80,000 a year and you decide to make an additional $5,000 contribution to superannuation account. Your marginal tax rate at $80,000 is 32 and a half per cent here in Australia, which means that without any superannuation contributions you would pay $1,625 in tax on that $5,000 of income. That makes sense. That's just income tax. However, because you're making an additional contribution, the contribution is taxed at that concessional rate of 15%, which means that you will only pay $750 in tax rather than the initial 1625. So this means that you're saving $875 in tax by making the super contribution. 

Alec: [00:06:46] Okay. It makes sense. 

Bryce: [00:06:47] Makes sense. 

Alec: [00:06:48] Yeah. So if I'm investing in my superannuation account, I'm already $875 ahead than I would be if I was investing outside my superannuation account. Yes, $875 compounded 8% a year over 40 years is. 

Bryce: [00:07:05] A lot.

Alec: [00:07:06] A decent amount of money. 

Bryce: [00:07:06] Yes. And so you can see that if you've got additional cash sitting there, you can reduce your taxable income by putting additional contributions into superannuation. So that's why people say it has great tax benefits and no argument there. So that is number one benefit for contributing more to super nice. 

Alec: [00:07:25] But there are other benefits.

Bryce: [00:07:26] There are others. Yeah. Well for me one of them is the long term savings nature of it. If you're a person that just really struggles with I guess the discipline and saving yourself, the vehicle of superannuation I think is really, really good for long term savings. So like you are forced, you are not being forced, but if you tell your employer you want to put in more money, it's going in there and you cannot touch it. Whatever you, regardless of what you want to do, you're not touching it until you're 65. So for me, I think it's a great savings tool for retirement. Thirdly, compounding and you said that 875 over the next 40 years, if you're we have superannuation accounts that kick off when we start work at eight years old or whatever it may be. If you're contributing extra from the get go, the compounding nature of that until you're 65 is massive. 

Alec: [00:08:15] There's an another element here which has become in stark focus the last few weeks with the government superannuation changes, which is you get this additional kick in compounding because the earnings that you earn in your superannuation account are taxed at a lower rate than earnings you would earn outside of your superannuation account. And so, you know, if you're getting paid dividends or yield on bonds or rent on property in that superannuation account, you get taxed less, which reduces the compounding. 

Bryce: [00:08:47] Mm hmm. Good point. And finally, it's such an easy investment option if you cannot be bothered to do investing in any other way. And I know the question is invest inside or outside of super, but if you're sitting there going, I literally don't want to do any sort of investing outside superannuation is a great vehicle to contribute more to the investment vehicle Is there? It's such a good thing, it's such a positive thing. 

Alec: [00:09:12] There are additional benefits if you're in the US or the UK. In the US, for one case, a lot of employers will do employer matches. So if you do additional contributions now that your employer will match it, you know, some tech companies might do 100% more, traditional companies might do 50%. So if you put an extra dollar in, your employer will actually put in an extra $0.50. That's pretty good. Again, you can just use your returns or the amount of money that you're investing in the UK best system in the world. I think Lifetime ISA is the government will put up to four grand in your retirement account for you every year. Yeah, that's pretty Good. Yeah, I would love to say that over here. Yeah. So then, you know, Canada, Australia, New Zealand, we're all tax advantaged and so the US and the UK, but there's also this like match over there. So that's another argument for contributing more. You might be able to actually get some money that you wouldn't otherwise get. 

Bryce: [00:10:12] Wow. It's interesting how it differs so much around the world. Yeah, well it's not that interesting. But anyway, so that's the arguments for contributing more to superannuation. The flip side is what are some of the arguments for investing outside of superannuation? 

Alec: [00:10:30] So the big one is around accessibility. And we've mentioned that right at the top, that key question, when do you want to access your money? In some countries you just can't access it before the age, the preservation age, or there are really strict conditions that allow you to access it all. You have to pay a big penalty to access it or a big tax bill. So accessibility is the big one. When are you going to want this money? When are you going to want to retire? And I think the big challenge is us sitting here at 30 or, you know, people even, you know, a decade or two out from retirement who are a little bit older than us, they're going to change so much and their lifestyles might change, their circumstances might change, knowing when you're going to need that money and being confident that you're not going to need it until you're 65 for me, feels like a a big statement for us to make it 30. Yeah, So I think that's the first one. There's this idea called The End of History Illusion, and it's that we've changed. We think about ten years and we've changed so much, but then we think about ourselves in the future and we don't think will change much too much to comprehend. Yeah, but the fact of the matter is we're going to change a heap and in ten years time we're going to look back like we look back in ten years now. And so we just have to acknowledge that reality that we're going to change a lot. Investing outside of you super gives you a little bit more flexibility or a bit more resilience in your finances. So that's number one. Number two is that regulation could change and the preservation age is 65 now, but I reckon by the time we retire, it's going to be over 73. 

Bryce: [00:12:08] Big time. 

Alec: [00:12:09] Yeah, yeah, yeah. And so that's just a question. Obviously there's also days tax changes that are in the news now. I think we can pretty confidently say that super will always be a tax advantaged environment. Things will move around the edges, but the fact of the matter is regulation could change and you're locking up your money for decades. And then the final argument against investing outside of your super, which actually could be an argument for depending on how you take it, limited investment options. So you have more flexibility and more choice investing outside of your super, which for some people that might be a bad thing. For some people that might actually be a great thing. 

Bryce: [00:12:50] So those are the pros and cons. We're going to take a quick break. And then on the other side, we're going to talk about actually how you can do it if you're interested in contributing more and then close out with how we approach superannuation. So when we know that you can contribute to super beyond what your employer is required to do by law, which at its base level is 10.5%, by the way.

Alec: [00:13:14] That's going up, though it will be 12. Yes. In the coming year. 

Bryce: [00:13:17] Ticking away. It's ticking away, which is good. So we'll be getting more into our superannuation. So employer is putting ten and a half per cent of your salary into superannuation. But the question is how can you actually contribute more? And there are two ways to do it. And it's a jargon filled industry. 

Alec: [00:13:34] Yes, yeah, yeah. We're going to try and keep it simple, but God, they make it. 

Bryce: [00:13:38] They make it difficult. So the two key terms to be aware of are concessional and non-concessional contributions. In other words, concessional paying everything that is treated pre-tax and non-concessional is everything that's traded post tax, which is confusing. 

Alec: [00:13:54] It's confusing because you can actually contribute to your concessional contribution after you've been taxed and then you claim a tax refund. Yes. So as we said, it gets confusing. 

Bryce: [00:14:06] But let's start with pre-tax. The most basic form is when your employer is putting in the ten and a half percent that they're legally required to do. You can tell your employer, I want you to bump up that rate from ten and a half percent to 12% and it's going or 13% or whatever percent you want, and then that additional contribution is going to go into your superannuation pre-tax. So there you go. You're going to get the tax benefits of doing that.

Alec: [00:14:28] Yeah, yeah, yeah. So you'll be taxed if you earn less than 250 grand a year, you'll be taxed at 15% on those contributions rather than your marginal rate of tax. As I said earlier, if you earn 80 grand, that's going to be 32 and a half percent. Yeah. So there's a saving there Now for the concessional contribution. You can contribute up to $27,500 a year. And you can tell your employer to do it or you can literally and we tested this before, you can literally just bpay into your super account. Yeah. And then that's money that you've already been taxed on if you've just got it in your bank account. So then you can claim a tax refund at tax time.

Bryce: [00:15:07] Yes, straightforward. 

Alec: [00:15:09] I just didn't think it would be as easy as paying, to be honest. 

Bryce: [00:15:12] Imagine if it was even more difficult than understanding the damn thing. So there is a concessional way of doing things, as we said, up to 27,500 per year. There's also non-concessional or post-tax, which is where you can then just throw lump sums of money into your superannuation account up to the value of $110,000 per year. Now you don't get any refund on this or anything like that. 

Alec: [00:15:40] So then the question becomes Bryce, if I'm not getting any tax refund, why would I put my money into super? 

Bryce: [00:15:46] Because again, once you put 110,000 in, it has different tax rules that are advantageous. 

Alec: [00:15:51] So your earnings will be taxed at 15% or 30% if you have over 3 million if the Government get their policy through. But at this stage at 15% rather than whatever your marginal tax rate is. Yes, so we've said tax a lot, but I think the long and the short of it is there are two ways to contribute the tax advantaged way you can contribute up to $27,500 and then the after tax way $110,000 a year. Those two are separate so you can put them together $137,500 if you have the means. And then once the money's in your super account, then it's all treated the same. Then it's all it gets. It's in that tax advantaged environment. Yeah. So that's how you can do it. And it is literally a B pay. We jumped on and you can just do it from your phone into your superannuation account and then they'll invest that money. So. Bryce as we close out this episode, quick question, how do you do it? How do you answer this question that we set out to answer at the start? Should I contribute more to my super or invest outside of it? 

Bryce: [00:16:59] So for me it does come down to having the ability to access my investments earlier than when I hope to retire and also having more investment options available to me. So that leads me to, at this point in time, only putting into superannuation what my employer does and all other investments are done outside of superannuation. I don't think for me at this stage that chasing down the tax benefits are worth it. I would rather be just putting the money into other investment options, but I know as I get older and life circumstances change, I might start to look at leveraging some of the tax benefits which I know, you know, a number of people certainly do. They get close to tax time, so they'll try and get as much of that 27,500 in there as they can. But for me, at this stage, everything is invested outside of super. 

Alec: [00:17:54] Yeah. So yeah, I'm the same, but I don't contribute anything extra to my super at the moment. Just the government guarantees going back to your work. Example, where the person made an extra $5,000 contribution and then got 875 back in their tax return. 

Bryce: [00:18:11] They saved 875 by putting it in to on tax. 

Alec: [00:18:16] Yeah. So if they did, they would have got 875 back. Yeah. So that's seven, they got $0.17 back on the dollar. So if I have cash sitting there that I'm not going to need. It probably makes sense to reduce your tax return. Put some in super to get $0.18, $0.17 on the dollar. 

Bryce: [00:18:33] Back and let compounding do its thing on the remaining for the next 65.

Alec: [00:18:36] Years. Yeah, yeah, yeah, yeah. It's an interesting one. It's one that I think I'm going to think more about. 

Bryce: [00:18:42] Yeah, it's definitely a topic that every time we discuss, there's more to learn, more to understand. We hope we've been able to help you think about the question of contributing more to super or investing outside of it. It is an unnecessarily complicated system. Every time we go to do more on it, there's more sort of rabbit holes to go down and different treatments depending on where you are in life. 

Alec: [00:19:03] So yeah, I mean, when we were doing our FSL courses and G one, four, six, all of that stuff, all the study we had to do to become the licensed superannuation is this one world where the administration and regulation of it is more complicated than the actual investment of it? It's ridiculous. Which it is , I guess. But yeah, anyway, it was noticeable when we were doing that. Yes. 

Bryce: [00:19:32] If you have a question that you'd like us to answer money or investing related, should it through contact@equitymates.com and we'll make sure we do our best to answer it. And we would really appreciate a five star review and a rating on Apple or Spotify. It does really help us get in front of new ears and new eyeballs on the podcast charts. So we love hearing your feedback. So please leave us a review, but then we'll be picking it up next week with a review of Raiz versus Spaceship versus CommSec. 

Alec: [00:20:03] Pocket. 

Bryce: [00:20:03] Pocket who comes out on top? Pick it up next week.