Saving for retirement outside super

Some considerations are:

• Need for cash. It’s a good idea to hold cash in readily accessible bank savings accounts and term deposits for daily living expenses and emergencies. Holding cash in term deposits with staggered maturity dates can help retirees manage their cash flow. It also helps avoid selling assets in a market downturn, and crystallising short-term market losses, to pay for immediate spending needs. Learn more about the role of cash and bonds in your portfolio.
• Your age. As mentioned earlier, if retirement is still a long way off, you may prefer not to lock your savings up in super where you can’t access them. Even if investments are earmarked for retirement, you may want to hold some outside super in case you need the money earlier than anticipated.
• Early retirement. Investing outside super is also a good idea if you want to retire early. That’s because you can’t access your super until you reach your preservation age (now age 60 for everyone), and retire or age 65 even if you continue working. Read more about conditions of release.
• Tighter super caps and restrictions. In some cases, you may have no choice but to invest outside super if you have reached your annual contribution limits or already have a high super balance. While you are still working there is a $30,000 annual cap on tax-deductible (concessional) super contributions and an annual $120,000 cap on after-tax (non-concessional) contributions. There is also a $1.9 million limit on how much super you can transfer into a retirement account; this is called the transfer balance cap.

If you are capped out, it then comes down to which taxable entity is best for you.. Options to consider are a testamentary trust, holding investments in your own name, or a company, depending on the types of assets you hold and your personal circumstances.

The type of assets you invest in can also have a bearing on whether you choose to hold them outside super.

A preference for property

Australians have an ongoing love affair with investment property, although numbers have dipped a little in recent years as rising interest rates and tighter prudential restrictions on interest-only lending begin to bite .

According to the most recent Australian Bureau of Statistics (ABS) figures, one in five (21%) Australian households own investment property and/or a holiday home. The vast majority (71%) of those own just one property other than their home, although 4% own four or more investment properties.

The main drivers of investment in real property are interest rates, negative gearing and the 50% capital gains tax (CGT) discount. However, the growth in the self-managed super fund (SMSF) sector has also played a role (see below).

Good reasons for holding property outside super

Investors who wish to own investment property can only do so within super if they have a self-managed superannuation fund (SMSF). One of the attractions of this strategy is that there is generally no tax on capital gains or investment income on assets, including property, held inside super once your fund is in retirement phase. 

Even so, it can be advisable to hold property assets outside your SMSF. For one thing, there are stringent rules for borrowing to buy property with your SMSF, but that’s not the only reason.

Also,  you don’t get the full tax benefits of negative gearing. That’s because income earned inside super during the accumulation phase is taxed at the concessional rate of 15% rather than your marginal tax rate, which applies to investments held outside super.

Another consideration is your age. Property is a long-term investment so the popular strategy of negatively gearing an investment property is best done when you are younger and able to fully enjoy the tax benefits of negative gearing and long-term capital appreciation.

Taking out a loan to buy investment property when you are close to retirement is high risk, as any increase in interest rates will eat into your retirement savings. Also, time is not on your side if there’s a major market correction that reduces your property’s value and you need to sell.

Diversification may also be an issue with a heavy dependence on property investment in retirement, in or out of super. Because property is a large single investment, you can’t just sell off a room when you need extra cash. Property is best considered alongside investments in other asset classes as part of a diversified portfolio.

The bottom line

Savings invested inside super are likely to produce a better outcome at retirement due to the tax advantages and long-term compounding, all things being equal. That said, considerations such as whether you have reached your super contributions limits, your age, tax position, cash requirements and other personal circumstances all come into play.

It’s never a good idea to look at your assets inside or outside super in isolation. In time, both will form part of your retirement income mix along with your eligibility for a full or part Age Pension.