The wealth accelerating benefits of super for young people
It's common for young Aussies to save up for that round-the-world trip, a car, or moving out, but what about saving for retirement or their first home? If you’re a student or young person, you can start preparing for a secure financial future by learning about super now. In this article we look at the benefits of early super planning for you, along with initiatives like the first home super saver scheme.
Choosing the right super account from the start
When you’re starting your first job, in most cases, you’ll be able to nominate your preferred super fund. So why not find one that truly meets your needs? As a young person, one of your central concerns could be working on growing your balance and preventing fees from eroding your super. When choosing a fund, these are some of the things you should consider:
- Fees - Super funds can charge a range of fees, including administration, investment, advice, switching and activity-based fees. Check the product disclosure statement and make sure you're aware of what fees are applicable.
- Insurance - Cover options such as life, disability, and income-protection insurance could be offered by default, so consider whether you need it or not and opt out if you don’t. Otherwise you could be automatically charged for it.
- Investment options - Super funds may offer different investment strategies. The right strategy depends on the level of risk versus reward that you’re comfortable with. For example, a conservative option might offer you low risk but low growth over the long term, while a growth investment option might expose you to higher risk but potentially higher returns.
- Performance - How has the fund performed in the past?
- Service - What type of service and support do they offer?
Maximising compounding power from voluntary contributions
As a young person or teenager, you could have the most to gain from paying extra into super because of the magic of compounding. By saving even modest amounts regularly and starting from an early age, your money in super has a lot of time to work hard.
Compounding and tax benefits
The compound power of super is enhanced by the fact super is treated favourably tax wise. Investment earnings - the money your super account balance earns through being invested - is generally taxed at just 15%. Voluntary non-concessional contributions – meaning contributions that you make into your super fund from your after-tax pay without claiming a tax deduction - can be made up to a total of $120,000 a financial year without any additional tax. You can also make voluntary concessional (before tax) contributions to your super account by having a salary-sacrifice agreement with your employer. These concessional contributions are taxed at just 15%, so it's another way for you to get more dollars into your super account and potentially pay less in tax.
The First Home Super Saver Scheme
Starting early with building super could allow you to save a deposit to buy a house earlier, thanks to the First Home Super Saver Scheme (FHSSS). The FHSSS lets you save money for your first home through your super account. Because super is taxed at the concessional rate of 15% (compared to higher rates of personal income tax), there is the potential to save a house deposit quickly within super. When you’re ready to buy a house, you can apply to release your voluntary contributions and related earnings (up to $50,000 in contributions plus the investment returns). You need to be at least 18 years of age and fulfil other eligibility requirements for the money to be released.
Other ways to make the most of superannuation
In addition to concessional and non-concessional contributions, young and old people alike can take advantage of government co-contributions to maximise their money in super. For example, if your total income for the financial year is less than the high income threshold (before tax) and you make non-concessional (after-tax) contributions to your super account, the government could make as much as $500 in co-contributions into your super. How much the government contributes will depend on how much you contribute in after-tax contributions and your income level. Additional eligibility requirements apply.
Additionally, you could also take advantage of the low-income superannuation tax offset (LISTO) if you earn less than $37,000 in a financial year. If you’re eligible, you'll receive a tax offset of 15% of the annual concessional (before tax) contributions you or your employer makes to your super account, up to $500 a year. The LISTO is paid directly into your super account if you’ve added you TFN to your account.
As a young person, it's useful to realise you’re well placed to benefit from superannuation so you can incorporate a super strategy into your long-term financial plan. The key is to choose the right super fund from the start, so a lower super balance won't be eroded by high account fees. Making voluntary, extra contributions from a young age also gives your super money a longer time frame to grow. Additionally, things like the FHSSS and other government initiatives could help you leverage your super balance to buy a house and save on tax.
At Student Super, we know that being a student isn’t always easy, so it’s important that you make the most of the benefits that come from super. Contact our team today to get your super account set up.
