Superannuation isn’t just limited to saving for retirement. Through making extra contributions, your super can even help you save for your first home deposit!
It’s often viewed as somewhere your employer pays contributions, where your money is then managed by someone else until you retire. The reality is, you have a lot of choice about how and where your money is invested. These choices you make when you’re young may be more important than you think.
Super funds often have options for how and where your money is invested. Our recent article shows a great example of how choosing an option with a higher investment return can make a huge difference to your superannuation balance by the time you retire. When we say huge, we mean it! The average 25-year-old was able to generate an extra $784,000 just from ticking a different box, have a read for yourself! Who said superannuation when you’re young was boring? Let’s dive a little deeper into what your options are, and which one is best suited for you.
The first step is to find out what investment options your superfund provides. Depending on the fund you’re in, there may be many options or just a few. Once you’ve researched what options are available to you, it’s important to choose one that reflects your personal values and financial goals.
The investment options you can choose from have different levels of growth and risk associated with them. The general options are:
Growth funds – These aim for a higher return and are accompanied with a greater risk.
Conservative funds – These focus on a low-risk portfolio which often means lower returns.
Balanced funds – These are generally the middle ground; they aim for a reasonable return accompanied by an average level of risk.
So which option is best for you? Unfortunately, there is no ‘one size fits all’ when it comes to investment options, and it is important to note that your goals will change over your lifetime. Choosing an investment option depends on your age and timeframe until retirement, and your tolerance for risk.
It’s easy for people to assume that they are a balanced investor, you get the best of both worlds, right? Well, it isn’t that straight forward. When you’re younger, with the benefit of time on your side, you have the ability to choose higher risk options as your investments have time to recover from market fluctuations. This means your money can benefit from better returns over this period. Leaving your super balance in the default option could be a $784,000 missed opportunity! As you age closer to retirement, your investments have less time to recover from market downturns and you may choose a more conservative option to ensure your assets are well protected. Speaking to one of our advisers is an excellent way to determine your financial goals and the options that best align with them. We can use our expertise to guide you through your options so you can rest assured that the money you’re working hard to earn is working just as hard for you.
Salary Sacrifice vs Personal Contributions
Choosing an investment option within your super fund is an excellent way to take charge of your super but making extra contributions goes one step further. Our recent article shows the benefits of making extra contributions but let’s look at how exactly this can be done. There are two options for additional contributions to super (if you’re an employee) that can optimise tax effectiveness and boost your super balance. You can choose to either salary sacrifice or make personal contributions.
Salary sacrificing is an arrangement you make with your employer whereby they make additional contributions beyond the compulsory superannuation guarantee (SG) amount, from your pre-tax earnings. This reduces your salary accordingly.
The second option is personal contributions where you contribute your post tax income and then claim this amount as a deduction when you submit your tax return.
It’s even possible to do both options if this is the most tax effective for your situation. At a time where you have competing expenses, salary sacrifice may seem like a low priority. The important thing to remember is that these contributions don’t have to be large to make a big impact. Our team is equipped with the knowledge to help you determine if extra contributions are right for you and the best way to do so. By talking to one of us about extra super contributions, you could benefit from lowering your taxable income or even accessing government co contributions.
While higher income earners often gain a greater tax benefit from making extra contributions, lower income earners may have the ability to utilise government co contributions. Government co contributions award you for making extra voluntary contributions to your superannuation. They work by the government paying up to 50 cents on the dollar for contributions you add.
If your total income is equal to or less than approximately $41,000, your maximum entitlement could be $500. If your income is between approximately $41,000 and $58,000, then your entitlement will reduce progressively as your income rises. This means you could get up to $500 free per year just as a reward for making extra super contributions!
When you’re receiving a lower income, often when you’re young or just starting your career, it is a great time to take advantage of these co-contributions. If you think you may be eligible for government co-contributions, come speak to one of our team.
First Home Super Saver Scheme
So, you’ve worked out how to best contribute extra savings to optimise your tax effectiveness, but did you know you can then use these extra contributions to help purchase your first home? After making extra contributions to your superannuation account, you can apply to release these contributions as well as the earnings they generated to use towards a house deposit. The maximum you can have eligible for release is $15,000 of contributions from one year, or $30,000 of contributions across all years (plus earnings from these contributions). Utilising the first home super saver scheme can be not only tax effective but also help you to generate greater returns on your excess cash rather than having it placed in a savings account, where its likely to earn a low interest rate. To use the first home super saver scheme, as suggested in the name, you must be a first home buyer and either live in the premises that you are buying or intend to as soon as practicable. Once again, if you think you may be eligible for this scheme, don’t hesitate to contact our team so we can help you reach your goals.
Optimising super when you’re young can really pay off in the long run. Even by choosing a new investment option which can cost you nothing or making small extra contributions and claiming government co contributions, you can really boost your super now and give it the opportunity to flourish throughout your working life. Speak to one of our advisers today to learn the choices you can make to kickstart your future.