Q&A: What are the pros and cons of starting an account-based pension vs investing outside super?

Term deposits through super are very common. And in fact, they’re getting even more common now as we’ve seen an increase in interest rates. And that’s being passed on. A lot of these banks also have online fixed accounts that are offering some pretty good rates of return. So, I am starting to see now a bit of money flowing back in to fixed term deposits. That could be within super or it could be outside of super. So really, what we need to look at with your question here, Wendy, is it should it be inside versus outside, which effectively where I think you are going with the question.

Now, when it comes to super, of course, it is probably the most tax efficient investment vehicle we can have. But it’s not the only one. There’s also having investments in our own names as well, and in family trust or in different vehicles. Generally, if we get it right within super, within our transfer balance cap, we have a zero tax rate on earnings. Any amount that we need to leave in accumulation, of course, is a maximum of 15 %. So, it’s a very tax effective vehicle.

But think about those that might not have any other income outside of super. They don’t have shares or property or large fixed interests or cash balances. So therefore, any earnings that they may receive on small amounts outside of super are tax free as well. We need to look at what that person’s marginal tax rate is. So again, what I’m looking at here is, I’m looking here at saying, do we just look at this as the whole super versus non super debate? How much you have already in super versus what you have outside of super. And then therefore, of course, it makes the comments quite simple.

If we leave it inside super in an accumulation account in a fixed term deposit, we’ll pay tax and maximum of 15 %. If I have that money outside of super with no other assets, no other income, I probably won’t pay any tax. So, in that case, the 15 % tax and accumulation will be more than what tax would be outside of super. So, we just need to think about how much we have and how much of our transfer balance cap has been used.

With the question around the tax from the term deposit, if you have that investment outside of super, any income from a term deposit (which is usually on maturity or for longer-term term deposits it might be paid on intervals), that interest would be included in our assessable income and taxed at our marginal rates, usually in the year that we receive that interest income.

So again, if we have no other income, tax rates would be zero. Remember, the first $18,200 of income each year is tax free. That’s a lot of fixed interest income that you could get with a significantly large balance before tax becomes an issue. So, superannuation is a great retirement savings vehicle but not the only one. Sometimes even having it in our own hands, in our own names, can result in a good tax out outcome.

The last comment that I wanted to mention quickly there was, again, this all depends on the underlying investment class. What you can invest in inside super is comparable to what you can invest in outside super. So, the term deposits aren’t just available outside super. Of course, we can get those inside super as well. So, I hope that answers your question as such. And it does come down to those other factors, as I said, your other income assessable income, how much of the transfer balance cap you’ve used, and those sorts of things.