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As the end of the financial year approaches, investors grapple with the age-old question: superannuation or property? Both options offer unique benefits and drawbacks, making the choice highly personal and dependent on individual circumstances and investment goals. This comprehensive guide delves into the intricacies of superannuation and property investments, providing valuable insights to help you make informed decisions.
Understanding Superannuation
Superannuation, often referred to as “super,” is a retirement savings scheme where individuals contribute a portion of their income during their working years to accumulate funds for their post-retirement lifestyle. As of March 2022, superannuation has become one of Australia’s largest asset pools, valued at a staggering $3.4 trillion. Contributing to super early offers a viable way to boost your super balance and achieve your financial goals by retirement. Maximizing your super contributions, in addition to the Superannuation Guarantee (SG) made by your employer, also offers tax savings, which will be discussed later.
Investing in Property: A Tangible Asset Approach
The Australian Financial Review aptly describes Australia’s “national obsession with residential property,” with the housing market now exceeding $8 trillion in value. This surpasses Australia’s GDP by approximately four times and is roughly $1 trillion more than the combined value of the ASX, superannuation, and commercial real estate. Investing in property, whether residential or rental, offers a range of benefits, including capital growth and potential income generation.
Choosing to purchase an investment property can provide investors with positive cash flow and potential tax deductions, with the ultimate goal of reselling the property at a higher value than the purchase price. However, before making any decision, it’s crucial to consider the benefits, risks, and costs associated with your investment options.
Superannuation vs Property: A Comparative Analysis
Comparing superannuation and property is akin to comparing apples and oranges. Property is an investment while super although invested, is a trust structure that holds assets on trust for the benefit of the member. Nevertheless, comparing these options is essential to determine the best investment strategy for your individual needs.
Performance and Market Volatility
The performance of both investments is contingent on broader economic conditions and how both property and super fare over the long term, based on market growth and downturns. Super is a long-term investment, as investors cannot access their funds until retirement age or until they meet specific release conditions. This means that short-term declines and market volatility are unlikely to impact your super over an extended period.
However, with property, declines in the market can impact both rental yield and the value of your property, often based on the law of supply and demand. Similar to other investments and markets, the property market also experiences cycles of ups and downs. It’s essential for investors to time their purchases or sales based on market conditions. Conducting extensive research to understand your time horizon, debt management, and other factors is crucial to ensuring that your investment property is a viable one.
Diversification and Risk Management
Super offers investors the opportunity to diversify their assets, which refers to the allocation of your super into different classes. This diversification can reduce the impact of volatility on your portfolio. With property, diversification is not as achievable. Unless you have an extensive portfolio, you only hold one asset, your property, and are therefore fully exposed to changes in that market. Therefore, it’s important for investors to consider their risk appetite and tolerance to determine the most appropriate strategy for them.
Tax Implications and Benefits
Each investment also has its individual tax benefits and drawbacks, which investors need to weigh up before making any decisions. Superannuation is generally taxed at 15% up to an annual limit of $27,500. This is particularly important for Australians earning over $45,000. Why this number? Above this income threshold, investors can expect to pay 34.5¢ in the dollar in tax (including the Medicare levy of every 2¢ in the dollar). However, allocating this money to super provides a tax saving of 19.5¢ in the dollar. Please note that individuals with a combined taxable income exceeding $250,000 do not receive the 15% tax concession and are taxed 30% up to $27,500. To read more about Division 293 tax, click here.
For those earning income over $120,000 and allocating $27,500 to super, this provides a tax saving of 24¢, and 32¢ for those earning over $180,000. This is to incentivize Australians to maximize and build up their super balances prior to retirement and also provides a viable way to reduce your annual tax bill. It should also be noted that if your super becomes an Account-based pension in retirement, this income is completely tax free! It is also possible to access unused contributions from previous years back to 2018-19, helping those who have yet to make use of these concessions to boost their super balance.
Investment properties also provide Australians with tax benefits, including interest charged on loans and rental expenses, which can be offset against your tax payable and reduce your tax bill. As buildings and the fittings inside depreciate, the depreciated value can be claimed as a deduction called a ‘non-cash deduction.’ There are a range of other costs and fees that can be offset, providing Australians with considerable tax savings.
Returns and Growth Potential
A crucial aspect of investing is the returns that certain assets generate. It’s important to note that super has generated a 157% cumulative return over the past decade if invested in a median high-growth option, and a 169% return if invested in a 100% growth option. Conversely, Australian house prices rose 84.3% over the last decade, which is just over half the growth of a high-growth super.
Therefore, when deciding between investing in super or property, it’s vital that investors of all ages consider the array of costs, benefits, risks, and tax implications before making any decisions that are likely to have a significant impact on their financial future.
The choice between superannuation and property is a personal one, dependent on individual circumstances, investment goals, and risk tolerance. Superannuation offers a long-term, tax-advantaged approach to retirement savings, while property provides the potential for capital growth and income generation. Carefully consider the factors discussed in this guide to make an informed decision that aligns with your financial aspirations.
Additional Considerations
- Time horizon: Superannuation is a long-term investment, while property can be a shorter-term investment, depending on market conditions and your exit strategy.
- Liquidity: Superannuation is generally less liquid than property, as you cannot access your funds until retirement or under specific conditions. Property can be sold more easily, but market conditions may impact the selling price.
- Management requirements: Superannuation requires minimal management, as your super fund handles the investment decisions. Property requires more active management, including finding tenants, managing repairs, and dealing with any issues that may arise.
- Personal preferences: Some investors prefer the hands-off approach of superannuation, while others enjoy the more active involvement of property investment.
Seeking Professional Advice
If you’re unsure which investment option is right for you, consider seeking professional financial advice. A qualified financial advisor can help you assess your financial situation, develop an investment plan tailored to your goals and risk tolerance, and provide ongoing support and guidance.
Property, Shares or Super? What is better?
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This is a question I get all the time. Individuals are attempting to determine which investment strategy is the best, but what exactly qualifies as better? This can vary greatly amongst individuals.
Therefore, you should determine which of those investments better fits your life rather than trying to determine which investment is better.
At this point, you’re probably completely perplexed and wondering what the hell I mean when I say that.
Do you have a personal response to this query?
Do you have your favourite?
Is It Worth Buying Property With Super? What Are the Rules?
FAQ
Is super better than investing?
Is it better to invest in shares rather than property?
Is it better to save money or buy property?
Is property a better investment than 401k?
Should you invest in your super?
If you can time the property market’s cycle, you can reap bigger financial rewards from property investments rather than investing in your super. However, it requires a solid investment strategy and proper research for it to pay off.
Is Super a good investment property?
Super is managed on your behalf, making it a comfortable choice for first-time investors. If you have no investment experience and you are not keen to learn more about investments, it could be best to just put your money in your super instead of buying an investment property.
Should I invest my money in real estate or a Super?
But some factors can affect both and can help you decide whether to put your money in real estate or contribute to your super. Investment property and super are both highly dependent on wider economic conditions. The performance returns of both can change depending on the economy.
Should you invest in property or superannuation?
If you’re looking for a long-term investment that will provide you with a steady income in retirement, then superannuation is a good option. But if you’re looking for an investment that you can enjoy prior to retirement while also potentially earning a good return, then property may be the way to go.