I earn $60,000 a year, but this is on a contract basis and my husband, who is 54, is self-employed and earns about $10,000 a year. After many years overseas we have returned to Australia and have such a ridiculously small amount held in super, however, we do have $70,000 in cash and are wondering how best to invest this money. Would it be prudent to buy a unit to rent out or just keep the money close at hand in a high interest account? Should we pay this into super over the next couple of years?
A.Provided by Craig Hall, NICRI
While any type of saving for the future is prudent, the best course of action depends on the reader’s personal circumstances and their attitude to the objectives as listed in our previous article titled ‘Is an investment property still a good investment?’
With regard to the above question there are a few important issues that spring to mind. Firstly what are your liquidity requirements? Will you need access to those funds in the short term or to have it available in case of an emergency? Buying an investment property or contributing to super will tie up and restrict access to this capital. When considering an investment property, look at the level of income it can generate less any debt repayments, assuming you will need to borrow further funds. Therefore you would need to look at your cash flow to determine if you will be able to cope. Another point to investigate is the potential for capital growth of the investment property.
So what about putting the money into superannuation? As mentioned previously, access to superannuation is limited to meeting a condition of release. This could be problematic for you as your husband is 54 and you are both still working. To access superannuation as a lump sum when under age 65 you need to have reached age 55 and be permanently retired.
Another area of consideration is taxation. If your husband earns $10k pa, his Marginal Tax Rate (MTR) would be nil and earnings generated would likely keep him within the tax-free threshold. Funds in superannuation are taxed up to 15 per cent until it is converted to the pension phase where earnings are tax-free. If you earn $60k pa the applicable MTR is currently 32.5 per cent excluding the Medicare levy.
What about the option of keeping it in a ‘high interest account’? Unless it was invested for a fixed term this option would allow access in case of emergencies or for expenditure in the short term. With regard to taxation and depending on who owns the account, the above taxation treatment would apply. Therefore if the funds were held in your husband’s name, and his income doesn’t change, it is unlikely that income generated will be taxed.
With regard to safety and risk, investing with an Australian Prudential Regulatory Authority (APRA) approved Australian Deposit taking Institution (ADI) would generally be the safest as it would come under the current Australian Government deposit guarantee. More information on the deposit guarantee and a list of APRA regulated ADI’s can be found on the APRA website.
Investing in superannuation or property is subject to the market movements those assets are exposed to although you can generally choose the type of asset allocation in superannuation so a defensive or conservative approach is achievable.
If you have other funds available and liquidity wasn’t a concern, you may be willing to invest in more growth-orientated assets over the long term. This would generally suit the objectives of wanting to outpace inflation and achieve long-term growth, and can be done within or outside the superannuation environment.
These are the major issues which stand out but consideration should also be given to the other objectives listed in our previous article, as they may be relevant to your needs.
Again, the best option depends on your personal situation, attitudes and aspirations. The best option chosen can only be determined after consideration is given to these points. Seeking professional advice with this may be necessary so the various strategies can be compared taking into account the above issues.
I hope this information has been helpful. If you have any further questions please don’t hesitate in contacting NICRI on 1800 020110 or via email at [email protected].
It is important to note that the National Information Centre on Retirement Investments Inc (NICRI) does not provide or imply financial advice. Any information provided is on its understanding of legislation and it is suggested that you confirm details with relevant government departments and seek professional advice before proceeding. //www.nicri.org.au/