There are tons of confusing terms and concepts in finance. Not fully understanding the meaning behind these terms can make it much harder to make the right financial decision.
Case in point: superannuation. One of the questions I get asked most is, “Should I put more money into superannuation?”
Today, I thought I’d break down the concept of super for you so you can determine if it’s a good option for your personal circumstances.
What Is Superannuation?
To put it simply, superannuation is a tax structure. It’s a fund you typically don’t see that is taxed and actually lodges a tax return.
Any income a super fund receives is taxed at 15%. Compare that to a personal tax return, where you typically pay anywhere between 0-45% (plus Medicare). How much you earn helps determine the specific tax rate.
Why Use a Super Fund
Let’s say $100 goes into a superannuation fund on a pretax basis (which means before it hits a bank account and before employer taxes kick in). Once it’s in your super, it’s taxed at 15%, or $15. That leaves you with $85 in your super fund.
But say you earned $100 and did not contribute to your super. Let’s also assume you made $50,000 total for the year and needed to pay tax rate of 32.5% plus 2% Medicare.
In this case, $34.50 of your $100 would go to taxes. Your take-home ends up being $65.50 — or a little less than what would be left in your super had you contributed your $100 to your fund.
When you just look at the math, superannuation can sound like the best option. But that’s not the only thing to consider when trying to figure out if you should put money into your super.
Money That Goes Into a Super Isn’t Easy to Take Out!
One of the biggest drawbacks is that you cannot touch the money in a super fund until you are retired. For most of us, that means 60 and no longer working.
If everything goes well, that might be just fine. But what if find yourself in a situation where you need that money, such as losing a job or a major emergency expense?
We all deal with financial emergencies, so contributing as much cash as you possibly can to a superannuation doesn’t make sense if you don’t have an emergency fund set up that you can use to help you pay for the unexpected.
Your super fund cannot be touched — but that can be a pro if you need help boosting your savings and keeping that money in the bank for the long-term. (It can be tempting to spend cash that’s readily available in your savings account. There’s no worries about that with your super.)
The Government May Change the Rules Around Supers
Another drawback is the ever-changing rules and regulations from the government. Currently, the law allows your super fund to be tax-free once you’re 60 and retired.
But it could change to a pension-style fund with increased restrictions on how much income can be taken out of it. Because superannuation is subject to many changes and legislation, it’s important to take that into consideration when deciding on putting money into a super fund.
The best course of action may be to put some of your earnings into a super — but keep some in your own easily accessible bank accounts for shorter-term goals and emergency savings.
Everyone’s circumstances are different, but it’s definitely worth considering superannuation. Just be sure to weigh all of your options and consult with a professional prior to making the commitment.
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This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate in light of your particular needs and circumstances. No representation is given, warranty made or responsibility taken about the accuracy, timeliness or completeness of information.