Super and Lump Sums: What You Need to Know About Superannuation and Investment Choices
Superannuation, commonly known as “super” is a crucial part of long-term financial planning. Whether you’re receiving a large lump sum from the sale of a property or business, or you’ve inherited money, understanding where to invest that money can make a significant difference in your financial future. In a recent discussion on ABC Radio Melbourne, investment expert Marco Mellado highlighted key factors to consider when making decisions about lump sums, superannuation, and taxes.
1. Understanding Super and Its Tax Benefits
Superannuation is a long-term investment option with significant tax advantages, particularly for those planning for retirement. The structure of your investment is essential—whether it’s held individually, jointly, in a trust, a company, or within a super fund. The superannuation option is especially attractive for long-term investments because:
- Low tax rate on earnings: Inside a super fund, earnings are taxed at just 15%, which is lower than many personal tax rates.
- Tax-free income in retirement: Once you retire and enter what’s known as “pension phase,” income generated from your super, including interest, dividends, and capital gains, becomes tax-free. This is a key advantage that no other investment structure offers.
- Restricted access: The downside is that super money is typically not accessible until retirement, which means if you need access in the short term, it might not be the best option.
2. The Role of Lump Sums in Super
Lump sums, such as those from selling a property, a business, or receiving an inheritance, often prompt people to consider their options for investing. Marco advises that, before deciding where to put your money, you must think about the structure of the investment and its long-term purpose.
- Superannuation: If the money is intended for use in retirement, super is an excellent choice because of the tax benefits and long-term growth potential.
- Access restrictions: The catch, however, is that you can’t access your super until around age 60, depending on your personal situation, so it may not be suitable for funds you need in the near future.
3. When Should You Consider Paying Off Debt?
One of the first priorities for anyone receiving a lump sum is to assess any outstanding debts, like credit card bills or a mortgage. Marco stresses the importance of eliminating debt before considering long-term investments.
- Debt reduction: Paying off high-interest debts like credit cards can free up more of your cash flow, allowing you to invest more effectively in your future.
- Investing afterward: Once you’ve dealt with debt, it’s time to think about your investment options, considering how tax treatment, accessibility, and growth potential play into your strategy.
4. Navigating the Superannuation Rules
Several conditions govern when and how you can access your super:
- Access after 60: The typical age for accessing superannuation is 60 or above. However, Marco warns that super is not typically accessible before this age, except in specific circumstances like COVID-related relief measures, which no longer apply.
- Pension phase: At 60 and beyond, you can enter what’s called the pension phase in super. Here, your superannuation balance can start working harder for you without any tax on income or capital gains.
5. Inheritance and Super: A Tax Consideration
A listener, Sue, raised a concern about the tax implications for her daughter inheriting her superannuation. Marco explained that if the super balance is inherited by an adult child, they may face what’s often referred to as a “death tax.” This tax applies to the taxable component of the super balance and can be significant.
- Strategies to minimize taxes: One strategy is to withdraw the entire super balance before passing, removing it from the super system and avoiding the death tax. However, this is not a practical solution for everyone.
- Re-contribution strategy: Another method involves withdrawing and re-contributing funds to reset the taxable components, minimizing the tax impact for your beneficiaries. This is a complex strategy that should only be done with expert advice.
6. The Downsizer Contribution: A Special Option
If you sell your primary residence after 65, you may be eligible for the downsizer contribution. This allows you to contribute up to $300,000 from the sale of your home into your super without it counting toward the usual contribution limits. This can be a tax-efficient way to boost your retirement savings while reducing your tax burden on the sale of your home.
- Joint contributions: If you and your spouse are both over 65, you can each contribute $300,000, allowing a potential $600,000 boost to your super balance.
- Investment property considerations: On the other hand, if you sell an investment property, the normal tax rules apply, and any capital gains may be subject to tax.
7. Transitioning to Retirement
Marco also discussed the concept of transitioning to retirement. If you are nearing retirement age, you can access a portion of your super while still working, and use those funds to supplement your income or pay off debts, such as your mortgage.
- Transition to retirement (TTR) pension: This allows you to access up to 10% of your super balance each year, even while you’re still employed.
8. Managing Super for Future Generations
If you want to pass on your superannuation to your beneficiaries, you should be aware of the tax treatment when it’s inherited. For adult children, as mentioned earlier, a tax of up to 17% (including Medicare Levy) may apply on the taxable component of your super balance.
- Charitable donations: If you wish to leave your super to a charity, it must first go through your estate. While there are ways to minimize taxes, leaving it directly to a charity won’t bypass the super tax system.
9. Self-Managed Super Funds (SMSFs)
Finally, Marco touched on self-managed super funds (SMSFs). For those interested in controlling their own super, an SMSF might be an appealing option. However, there are no legally mandated minimum balances for setting up an SMSF. It’s important to consider whether it makes sense based on your assets and the costs associated with running an SMSF.
- Cost and responsibility: While there’s no minimum, SMSFs typically require a balance of around $200,000 to $250,000 to make sense from a fee perspective. However, it’s critical to remember that running an SMSF involves significant responsibility and should not be undertaken lightly.
Conclusion
The discussion around superannuation and lump sum investments can be complex, with various factors such as tax implications, accessibility, and long-term goals playing a role in shaping your decisions. Whether you’re receiving a lump sum or planning for your retirement, seeking professional advice to tailor your strategy to your individual needs is crucial.
The benefits of superannuation, especially with its concessional tax rates and tax-free earnings in retirement, make it a powerful tool for long-term wealth building, but its restrictions and rules require careful planning.
