Receiving an inheritance is usually a mix of emotions. Although you’re happy about the improvement to your finances, it’s often coupled with sadness about the loss of a family member or friend.
It also brings lots of confusion about 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 some of the money away for your retirement. Here’s 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 have administration and transaction costs like stamp duty or brokerage fees.
- 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.
Inheritances can be a significant amount 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
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.
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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 Super for beginners: How superannuation is taxed.
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.
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.
Stops you spending it
If you contribute some or all of 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’.
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 Gaining from the Government: How you can score a co-contribution freebie.
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.
Contribution amounts are limited
There are strict caps on the amount you can contribute into your super account. In 2019/20, concessional contributions are capped at $25,000, while non-concessional contributions are limited to $100,000 (if your total super balance is under $1.6 million).
One way to contribute more is to use a bring-forward arrangement. This allows you to bring forward an additional two years of non-concessional contributions, up to a maximum of $300,000. For more information about the bring-forward rules, read SuperGuide article A super guide to understanding the bring-forward rule.
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 65 and over, you must pass the work test before making a contribution. For more information read SuperGuide article Super’s rulebook: What rules apply to you at different ages?
Paying off your mortgage may be better
For some people, it makes more financial sense to pay off your home loan rather than contribute your inheritance into super. Putting extra money into your mortgage means you pay off your debt quicker and save on interest. Check out ASIC’s MoneySmart Super vs. Mortgage Tool to help you decide.
Risk exceeding your Total Super Balance (TSB) cap
If your TSB is over $1.6 million, 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 Definitive guide to the $1.6 million transfer balance cap.
Case study: Contributing an inheritance into super
Ravi is aged 60 and married to Amal, age 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 super 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 $400,000 from the inheritance into their super accounts. The remaining $100,000 will be used for a holiday and renovations to ensure their home does not require significant expenditure after retirement.
Both Amal and Ravi are under 65, so they decide to make non-concessional contributions of $200,000 each into their super accounts using a bring-forward arrangement. This allows them to use up to three years’ worth of non-concessional contribution caps (3 x $100,000) in a single year.
As Amal and Ravi both make a $200,000 contribution, any additional non-concessional contributions over the next two years will be limited to $100,000.
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