The pros and cons of investing your inheritance into super

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Receiving an inheritance is usually a mix of emotions. Although you’re happy about the improvement to your finances, it’s usually coupled with sadness about the loss of a family member or friend.

It can also be confusing working out the best way to manage the bequest.

While your first thought may be to pay off your mortgage or take a holiday, it’s worth considering putting at least some of the money away for your retirement. Here are some pros and cons to help you decide.

Points to consider before making a decision

It’s important to carefully review your current financial situation before you decide how to use an inheritance:

Look at things like your level of debt, income and cash flow, how much risk you feel comfortable with and how close you are to retirement.
List your future financial goals – such as taking early retirement or travelling overseas for an extended period.
Consider eliminating any significant non-deductible debts like credit cards and car or personal loans to reduce your financial stress level.
Think about the cost of investing outside the super system. For example, buying shares or a rental property outside super have administration and transaction costs like stamp duty or brokerage fees, while any income or capital gains will be taxed more heavily.
Talk to an independent financial adviser. They can help you work out your financial goals and offer personalised advice about the best course of action for your particular financial situation.

Super tip: Inheritances can involve significant sums of money, so take your time and don’t let emotions sway your judgement. Think carefully about your decision and your financial and lifestyle priorities. Avoid making a snap move you may regret later when you’re feeling less emotional about your loss.

Contributing an inheritance into super: 10 points to weigh up

Advantages

1. Lowers your investment tax bill

If you receive a lump sum, putting it into super can be a sensible option as the super system is a tax-friendly environment. Generally, you only pay 15% on any investment earnings, which is usually a lower tax rate than outside the super system.

If you start a super pension, your investment earnings are tax free. The same earnings outside super are taxed at your marginal tax rate.

For more information read SuperGuide article How superannuation is taxed: Super for beginners guide.

2. Builds your retirement savings

Adding some of your inheritance to your super account can be an easy way to boost the money you have to spend in retirement. Making a voluntary contribution gives your money time to grow and means you could enjoy a better standard of living in retirement – without having to rely on the Age Pension.

3. Gives you access to more investment options

Large super funds offer access to a wide range of asset classes. Personal investors often find it hard to gain exposure to asset classes like overseas bonds, infrastructure, commercial and international property, private equity and commodities. Investing through a super fund makes it easier to access these assets.

4. Stops you spending it

If you contribute some or all your inheritance into your super account, you won’t be able to fritter it away on the latest iPhone or endless restaurant meals and overseas holidays. Super is generally not accessible until you reach your preservation age, so it’s there quietly growing until you need it, rather than disappearing on the latest consumer ‘must have’.

5. Can provide a government freebie

If you move some of your inheritance into your super account as a non-concessional contribution, you may qualify for a co-contribution payment of up to $500 from the government.

For more information about eligibility read SuperGuide article How a government co-contribution can help boost your super savings.

Disadvantages

6. Money isn’t easily accessible

Once your inheritance is in your super account, you won’t be able to immediately access the money as you can with investments outside the super system. You must meet a condition of release before you can access the money.

For more information, read SuperGuide article When can I access my super? All conditions of release explained.

7. Contribution amounts are limited

There are strict caps on the amount you can contribute into your super account. In 2021–22, concessional contributions into your super account are capped at $27,500, while non-concessional contributions are generally limited to $110,000 if your total super balance (TSB) is under $1.7 million. (From 1 July 2017 to 30 June 2021, the concessional and non-concessional contributions caps were $25,000 and $100,000 respectively.)

One way to contribute more is to use a bring-forward arrangement. If you are eligible, you may be able to bring forward an additional two years of your general non-concessional contributions cap, up to a maximum of $330,000 ($110,000 x 3 years = $330,000). The actual amount you can contribute using the bring-forward rule depends on your current Total Superannuation Balance (TSB).

For more information about the bring-forward rules read SuperGuide article A super guide to the bring-forward rule.

8. Age limits on super contributions

You may not be eligible to contribute your inheritance due to the age and work test limits on contributions. For example, if you’re aged 67 and over, you must pass the work test before making a contribution.

For more information, read SuperGuide articles Super rules: What rules apply to you at different ages? and Work test: Making super contributions after you turn 67.

Need to know: In the May 2021 Federal Budget, the government announced it planned to repeal the current work test for making non-concessional and salary-sacrifice super contributions if you are aged between 67 and 74. It would also increase the cut-off age for making bring-forward contributions from under 67 to under 75. Legislation has passed both houses of parliament and these measures will come into effect on 1 July 2022.

9. Paying off your mortgage may be better

For some people, it can make more financial sense to pay off your home loan first, rather than putting your inheritance into super. Reducing your mortgage means you pay off your debt quicker and save on interest. Apart from financial considerations, paying off your mortgage can be a weight off your shoulders.

Check out ASIC’s MoneySmart Super Contributions Optimiser for the best way to contribute into your super account.

10. Risk exceeding your Total Super Balance (TSB) cap

If your TSB is $1.7 million or over (in 2021–22), you’re not permitted to make any additional non-concessional contributions without paying tax. Check your current TSB to ensure contributing your inheritance will not take you over your TSB cap.

For more information read SuperGuide article Total Superannuation Balance: When it applies and what is included.

Case study: Contributing an inheritance into super

Ravi is aged 60 and married to Amal, who is 58. They both work in well-paid management roles and paid their mortgage off many years ago.

Between them, their super accounts total almost $650,000, but they’re keen to boost their savings a little more before Ravi retires at age 65.

Sadly, Amal’s mother passes away due to ill health, leaving her an inheritance of $500,000.

After considering their financial position, Amal and Ravi decide to contribute $420,000 from the inheritance into their super accounts. The remaining $80,000 will be used for a holiday and renovations to ensure their home does not require significant expenditure after retirement.

Amal and Ravi decide to make non-concessional contributions of $210,000 each into their super accounts using a bring-forward arrangement. The bring-forward rules allow them to use up to three years’ worth of annual general non-concessional contributions caps (3 x $110,000 from 1 July 2021) in a single financial year.

As Amal and Ravi both make a $210,000 contribution, any additional non-concessional contributions they each want to make over the next two years will be limited to $120,000.

Need to know: Previously, once you reached age 65 you were unable to access the bring-forward rules if you wished to make a large non-concessional contribution in a single year. Following the passage of the Treasury Laws Amendment (More Flexible Superannuation) Act 2021 on 22 June 2021, the rules for using a bring-forward arrangement have been extended to people aged 65 and 66. The change has been backdated to 1 July 2020 and will apply for non-concessional contributions made during 2020–21.

Further legislation, which has passed both houses of parliament, increases the cut-off age for bring-forward contributions from under 67 to under 75.