9th April 2021
Superannuation Part 2
Welcome back to another instalment of the Finance Students’ Association’s Millennial Money Series. Today, we will continue our discussion of Super. Last week we talked about what Super is exactly and why it’s important for young people to start thinking about their Super. Today we will elaborate on exactly what choices can be made when it comes to Super.
What are some of the Choices?
Portfolio: Risk vs Return
Most established Superfunds will have various portfolio’s which the individual can choose from. The default portfolio generally has a moderate to high level of risk and therefore a moderate to high level of return. You have the option of selecting a portfolio of a higher or lower level of risk depending on your preferences.
It is worth noting that when Super ads are on TV and they quote their average return (e.g., 9% on average for the past ten years), this is generally the average return for the highest risk portfolio that they offer and would not reflect the average return which investors receive. Indeed, it is not the default setting to be allocated to the highest risk portfolio. Therefore, if you are unaware of this, and are comfortable bearing a higher risk tolerance, then you could be missing out on significant long-term returns. Young people can generally bear a higher risk tolerance, because they have time to ride out the ups and downs of the market.
However, keep in mind that this is general advice only and always consider your personal characteristics and circumstances when making this decision.
Also keep in mind that the actual return is different from the expected return and that past performance may differ from future performance. Indeed, with high-risk portfolios, there is a high chance of earning below average or negative returns in any given year. If you are not comfortable with this, then consider a portfolio with a lower risk profile.
Voluntary Contributions (before-tax vs after-tax)
Before tax contributions (a.k.a. salary sacrificing) involves getting one’s employer to set aside additional contributions to your Super account. These contributions are not taxed at the marginal tax rate, but rather at 15% (the rate which applied to Super).
After tax contributions involves making contributions from after tax income to the Super account. These are not taxed again, because tax has already been paid. This is beneficial for people below the tax-free threshold ($18200) because they pay 0% tax on super contributions, rather than 15%. Anyone above this threshold should use salary sacrificing instead, to generate a tax savings. The other difference is that there is a much smaller cap on before tax contributions compared to after-tax, mainly to prevent high income earners using this as a tax saving instrument.
If you are in a stable financial position, this can be a great way to boost your contributions from a young age and increase your nest egg in the future. Even a small contribution can go a long way.
What are the Right Choices?
Ultimately it depends on your personal circumstances, risk tolerance and a variety of other factors. The purpose of this article is therefore not to convince you one way or another, but rather to present all the options available and get you thinking about how to maximise your Super. As always, please seek a financial advisor if you require professional advice.
Other Super Tips
One thing worth considering is the government’s co-contribution scheme for voluntary, after-tax payments. If you max after-tax contributions of $1000 or more in a year, you can receive a $500 co-contribution from the government. Better yet, there is no separate application, as this is processed when someone lodges a tax return. Check out this website for more information.
Also, you should be aware of your rights when it comes to superannuation. As mentioned last week, it is a legal requirement to make Super payments to employees earning over $450 per month in most circumstances, including for international students. To learn more, check out this website for more information.
We hope you took a lot out of these two articles about Super and are interested in finding out more and thinking about the choices you can make for the future. Next week we will be discussing tax in more detail..
The Finance Student's Association is not a financial adviser, the views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.