Super and the coming generational wealth transfer

Simon Webster

Nov 20, 2024 – 11.37am

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Gens X, Y, and Z are about to come into some money. In what’s become known as the great wealth transfer, in the two decades from 2023 Australia’s over-60s are expected to hand down $6.2 trillion worth of assets to their heirs, says McCrindle.

Before you lock any money away in super, you should consider carefully whether you might need it before you retire, or whether you feel it might be better put to other uses, such as paying off a mortgage or investing elsewhere. Colonial First State

There are, of course, many ways to invest an inheritance (or squander one, for that matter). But one strategy that may be worth considering is putting funds from your windfall into super. This can have a number of benefits, says Lachlan Anderson, a partner and financial adviser at Discover Financial Partners in Melbourne.

“To begin with, superannuation in Australia can be an easy way to get money into a diversified portfolio of investments,” Anderson says. “Most people have their superannuation invested across shares, bonds, property and cash, and the funds themselves often do a good job of spreading funds, and risk, across these different asset classes for you.”

Secondly, there are the tax benefits that can apply both to super contributions and earnings within super, Anderson says. And if you’re close to retirement you’ll soon be able to access your super as a lump sum, or as income, tax free.

But what if retirement is a way off? Before you lock any money away in super, you should consider carefully whether you might need it before you retire, or whether you feel it might be better put to other uses, such as paying off a mortgage or investing elsewhere.

“With superannuation being inaccessible until at least age 60,” Anderson says, “it is important to evaluate your need for money and your goals for your finances before making any contributions.”

However, there’s definitely something to be said for delayed gratification. If you’re sure you can afford to wait, sticking money in your super vault can be a way of saving it from yourself. “Having the discipline not to spend money that is readily available is a rarity in today’s world. If funds are contributed to super, there is a positive element of out of sight, out of mind, and this can lead to a better long-term financial outcome.”

What are the tax benefits of putting inheritance funds into super?

Craig Day, head of technical services at Colonial First State, says putting money into super can offer multiple tax benefits.

You can get your first tax break when you make super contributions. “When you contribute to super and claim a tax deduction, the contribution will be taxed at just 15 per cent – or effectively up to 30 per cent if your income is over $250,000 – while the deduction reduces your assessable income that may otherwise be taxed at your higher marginal rate,” Day says.

Concessional tax rates also apply to your investment earnings within super, which are generally taxed at a maximum rate of 15 per cent for income and 10 per cent for capital gains. This means the after tax returns you receive on your super savings will generally be higher than if they were invested the same way outside super. And that difference can add up to a large amount when compounded over time.

Then, when it’s time to hang up your boots, super offers another tax bonus.

“Once you retire and move to pension phase, the tax rate is zero not only on the income payments you receive from your pension account, but also on the investment earnings within your pension account,” Day says. “However, a transfer balance cap does apply to limit how much you can transfer to the tax-free pension phase.”

What are the limits?

Contribution caps limit the amount you can add to your super. These caps vary depending on the type of contribution you make, Day says.

“For concessional contributions, such as a personal contribution you claim a tax deduction for, an annual cap of $30,000 currently applies.” However, if your total super balance at last June 30 was less than $500,000, you can also carry forward any unused cap amounts from the previous five years and use them in the current year.

Alternatively, you can make a contribution and not claim a tax deduction. These types of contributions, known as non-concessional contributions, are currently limited to $120,000 a year. However, depending on your super balance, if you are under 75 you may be eligible to bring forward up to two years of additional caps to make a contribution of up to $360,000.

Can I transfer shares or property into super?

Generally speaking, when it comes to super contributions, cash is king. Large public-offer super funds will generally only allow you to contribute cash, not assets, Day says. “If you inherit assets such as shares, you will generally need to sell them and contribute the cash proceeds.”

If you have a super wrap or a self-managed super fund (SMSF), you may be able to transfer any listed shares you inherited to your fund via an in-specie contribution, Day says. And in some limited circumstances, you may also be able to transfer a property you inherited to an SMSF via an in-specie contribution where it’s used to run a business. However, your ability to do this may be limited by the contributions caps.

Note that selling inherited assets, or transferring them to a super fund, may incur capital gains tax.

Whatever kind of inheritance you receive, financial advice can be a big help.

To learn more, visit cfs.com.au/