With a little more certainty surrounding the superannuation system following the May 2019 Federal Election, it’s a good chance to take stock and consider how to use our self-funded retirement system to maximise returns.
Superannuation is a tax-advantaged retirement account, and as such, can be an investor’s best friend when it comes to long-term capital gains and portfolio growth.
How does superannuation work?
Superannuation was designed to allow Australians to self-fund their retirement and reduce the burden on the government to provide a pension for the population, particularly given we have one that is rapidly ageing.
While it’s always wise to check the current rules and be wary of any potential changes to the system, your superannuation money is more or less locked away in your super account until you reach preservation age (currently 60 years old).
However, the benefit of superannuation can be two-fold – putting assets into a tax-advantaged account can increase net returns compared to a standard share portfolio taxed at your marginal income rate, while super can also be used to sacrifice salary into and pay less tax.
So while the system sounds great, the money is tied up in that super account for a long time, representing a liquidity risk, and the government could always be tempted to make changes to increase its own revenue, meaning regulatory risk exists as well.
Why superannuation could be your best friend
Particularly with the rise of self-managed super funds (SMSFs), superannuation can provide investors who are looking to build wealth up until retirement age with a great way to do so – and still have the flexibility to invest their funds wherever they like.
While an SMSF is not for everyone, particularly given the strong performance of many industry super funds in recent years, it can provide a great vehicle to put those shareholdings away and generate better after-tax returns – albeit unrealised ones for the next however many years.
For those in higher income brackets, salary sacrificing or putting away additional money into your super account (more money to invest in the ASX!) can also reduce your taxable income and mean more of that hard-earned cash can start generating returns for you inside of the super system.
As always, there’s no one-size-fits-all solution for retirement and tax planning, so it’s best to check with a sound financial advisor on what the most tax-efficient and beneficial use of your superannuation is for you.
This will allow you to focus on the important stuff – like picking the next Afterpay Touch Group Ltd (ASX: APT) on the ASX.