It's the age-old question: should I be investing in super?
The Aussie superannuation system can be divisive. Many, particularly the younger cohort, are reluctant to invest additional cash into their super funds.
However, I'm a big believer in the power that super funds can have to turbocharge retirement plans.
Here are a few reasons why investing more money in super can be a great idea for investors of all ages.
Concessional contributions are taxed at 15%
This is a really big factor in favour of investing in super. Concessional contributions up to $25,000 per year are taxed at just 15% by super funds.
For reference, every dollar earned between $18,200 and $37,000 is taxed at 19%. Beyond that, Aussies are taxed progressively at 32.5%, 37% and up to 45% per dollar above $180,000 per year.
That means investing in super as concessional contributions can generate a significant tax break. As a long-term investor myself, that seems like a no-brainer.
I plan on using that money at 65+ anyway, so I might as well save some tax along the way.
Investing in super means less tax on capital gains
This is another big consideration but one that is often overlooked.
A capital gains event generally occurs when an asset is sold. If that is outside of super and the asset has been held for over 12 months, the investor would get taxed at their marginal tax rate.
However, capital gains within super get another handy tax break. During the accumulation phase, super funds typically receive a one-third discount on any capital gains made.
Given super funds are taxed at the flat 15% rate, that means the capital gain would be taxed at effectively 10%.
That's compared to anywhere between 19% to 45% for investing outside of super if you earn upwards of $18,200 per year.
Super funds can invest big and long-term
Super funds have large pools of capital to invest across their various strategies. That means investing in super can get you access to investments that would otherwise not be possible.
This includes allocations to private equity, hedge funds and infrastructure assets. These investments can generate liquidity premiums and boost overall returns.
Investing in super is just one part of your strategy
The good news is, it doesn't have to be all or nothing when it comes to investing in your superannuation. You can still keep your investments outside of super, but you may need less of them.
For instance, you could build up a sizeable portfolio of ASX shares or hold a broad market ETF like BetaShares Australia 200 ETF (ASX: A200) alongside your growing superannuation fund.
If you retire early, you simply draw down your ETF holdings outside of super down to zero until preservation age.
From there, your super investment kicks in and you can have a happy retirement.
But… there are drawbacks
Of course, if it was all good news, everyone would be investing more in super with no questions asked.
The reality is that there is an opportunity cost of contributing more to your superannuation.
That money is locked away for a long time and could be otherwise deployed elsewhere. For instance, you could buy ASX shares outside of super, pay down debt or save for a home deposit.
The First Home Super Saver (FHSS) scheme does help to alleviate this in some sense, but not completely.
There's also a significant regulatory risk. Many investors worry that the preservation age will change by the time they retire.
The government could also view super as a convenient way to pay back deficits through higher taxes.
Foolish takeaway
In the end, investing additional money in super is a personal choice. However, I think the benefits outweigh the potential risks for me as it currently stands.
