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Receiving an inheritance is usually a mix of emotions. Although you’re happy about the improvement in your finances, it’s coupled with sadness of losing a family member or friend.
It can also be challenging 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 the best course of action.
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.
Contributing an inheritance into super: 10 points to weigh up
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.
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 available 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.
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.
7. Contribution amounts are limited
There are strict caps on the amount you can contribute into your super account. In 2022–23, concessional contributions 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.
One way to contribute more is to use a bring-forward arrangement. If you’re 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).
8. Age limits on super contributions
You may not be eligible to contribute your inheritance due to the age limit and work test applying to some super contributions. If you’re aged 75 and over, you are ineligible to make a large contribution into your super account.
If you are aged 67 to 75 and plan to make a contribution into your super account and claim a tax deduction for some part of it in your annual tax return, you must pass a work test before you’re eligible to claim the deduction.
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 – particularly at a time when interest rates are rising. Apart from financial considerations, paying off your mortgage can also be a weight off your shoulders.
10. Risk exceeding your Total Super Balance (TSB) cap
If your TSB is $1.7 million or over (in 2022–23), 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.