Investing your savings can sometimes be better than adding to super

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When looking at the reasons now whether you should top up your superannuation, the inability to access your superannuation because of preservation rules should not be a concern.

Super will be completely accessible

Based on current rules, if you are over 65 then your superannuation will always be completely accessible whether you continue to work or whether you are retired.

The biggest question will come down to tax. In other words: are you better off from a tax perspective to invest these additional cash savings in a superannuation environment or in your personal name?

When looking at the superannuation environment the key tax arbitrage will be whether you can convert these personal contributions to a pension. If you can, then there is no better tax outcome as the taxable income will be taxed at zero and all withdrawals after age 60 are tax-free.

However, if the contribution is forced to stay in the accumulation account, given you have already maxed your transfer balance cap, then you may well be better off investing these additional savings in your personal name.

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In a superannuation environment, taxable income relating to your accumulation balance will be taxed at 15 per cent from the first dollar.

Investing personally or in super?

When comparing that investing personally, you can earn up to
$18,200 in investment income each year as an individual before you start paying tax.

For a couple earning no other income that represents $36,400 in taxable income that is tax-free.

Looking at a comparison between investing personally versus investing in superannuation, given you pay 15 per cent tax on investment earnings from the first dollar with accumulation account savings, you could earn up to approximately $50,000 in investment income in your personal name with no other income before your average tax rate hits 15 per cent.

If you equate that to a capital amount earning an
average 5 per cent per annum that means that the breakeven is approximately $1 million.

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If you can add this amount to your superannuation as a personal contribution this will obviously not be possible in a single lump sum and will take a number of years given the annual contribution caps.

There are other important factors to consider such as Centrelink and the investment mixture you are looking to deploy with these additional savings.

For example, the use of investments with franking credits provides a credit for tax paid at the company tax level. Where your marginal tax rate is lower then you will be entitled to a tax credit, which can be refunded in the form of cash to the investment entity where the franking credits result in a tax refund.

With any change in rules, there is often a call to action.

The new contribution eligibility rules certainly simplifies the analysis now whether the work test rules apply when adding personal after-tax
contributions.

However, the analysis from a tax perspective is not as a clear-cut, and you may, in fact, be better off investing in your personal name if you are unable to add those personal contributions to a new pension account in your superannuation fund.