Superannuation advice: when to keep your money out of it

Our retirement savings system is low-tax and among the world’s best, but sometimes it should be shunned. Here’s why.

Most Aussies will find superannuation is the best investment vehicle for saving for their retirement.

Money in super attracts low tax while building nest eggs, and usually zero tax on income, gains and withdrawals when retiring after age 60.

Also, you get to claim tax deductions for up to $30,000 of your super contributions each year.

But wait, there’s more. Government incentives provide extra money for low and middle income earners who pump cash into their super, or spouses who top up a low-income partner’s super account.

A financial strategist I’ve known and quoted for many years shares great advice about superannuation: inject as much as you can, as soon as you can, for as long as you can.

Despite constant government tinkering with super rules over several decades, it still remains the best structure for most retirement savers.

Australia’s super system is among the world’s best, but sometimes it shouldn’t be used.

However, sometimes it’s wise to have some or all of your wealth outside superannuation, because leaving it there can be potentially costly.

Here are some key examples when people should consider holding money and assets separate to super.

YOU WANT IT BEFORE 60

Your superannuation is locked away until you reach preservation age – typically 60 – so anyone wanting to retire earlier, or build an investment portfolio or other wealth outside of super, should keep those assets separate.

There are options to withdraw super early to cover medical bills or severe financial hardship (or when Coalition governments unlock it during pandemics), but the majority of Australians cannot access it.

This means popping cash into super to save for a car or holiday is a no-go.

PROPERTY INVESTMENT

Aussies love owning real estate, whether it’s their own home or an investment property, and this is generally best done with money outside the superannuation environment.

You can buy an investment property within super, but there are complex rules around this strategy. It can only be done in a self-managed super fund, and very few lenders provide loans. In contrast, it’s simpler and cheaper to use equity in your own home to buy more investment properties.

Super and real estate can go hand-in-hand when building wealth. My personal strategy for almost 25 years has been to build a property portfolio outside of super to help me (hopefully) retire early, then use super as a top up from my mid-to-late 60s.

AVOID DEATH TAXES

Australia does not have an official death tax, but if you die with money in superannuation and it goes to a non-dependent – such as an adult child – much of it can get slugged with a 15 per cent tax.

The best way to avoid this is to know exactly when you’re going to die and withdraw your super just before. Sadly, most of us don’t have this luxury, and people need to consider their super in estate planning.

Super money left to a spouse or dependent – such as children living at home – does not attract the tax.

YOU’VE GOT TOO MUCH

The majority of Aussies won’t have this problem, as the rules around how much individuals can hold in super are pretty generous.

For example, each of us can hold $1.9m in a superannuation pension in retirement – $3.8m for a couple – and it’s rising to $2m on July 1.

Other caps could come, following Labor’s failed plan to slap a 15 per cent tax on people with balances above $3m, so it’s wise to keep an eye on proposed rule changes in the looming election campaign.