As a young professional, you probably have a bit more money than you did during your student days. You might be saving for your next trip or a new car, or even starting to think long term, like buying your first home or getting your super organised.
In this article we look at the role superannuation can play in growing your wealth, even when you’re young.
Choosing the right super account from the start
The first step is to make sure you have the right account for you. In most cases, when you start a new job, you’ll be able to nominate your preferred super fund. When choosing a fund, find one that truly meets your needs. Here are a few points to 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 - Life insurance is sometimes offered by default, so consider whether you need it and opt out if you don't. Otherwise you could be automatically charged for it.
- Investment options - Super funds may offer different investment strategies. This refers to the level of growth potential and volatility – choose one that you're comfortable with. For example, a conservative option might offer you low growth with low volatility, while a growth strategy may have higher return potential with higher volatility.
- Performance - How has the fund performed in the past? Look at the returns the fund has had net of fees (minus fees). You can also look at this measure in comparison to other super funds.
- Service - What type of service and support do they offer? Things to look at include the funds features, how easy they are to use and how they differentiate from other funds.
Maximising the power of compound interest with voluntary contributions
As a young professional, there’s a lot to gain from putting extra money into your super because of the magic of compounding. The key ingredient to compounding is time. By saving small amounts regularly early in your career, your super money has a lot of time to compound.
Compounding and tax benefits
The compounding power of super is enhanced by the fact that super receives special benefits when it comes to tax. Investment earnings - the money your super money earns - is usually taxed at just 15%.
Additionally, voluntary non-concessional contributions - those you transfer into your super fund from your after-tax pay without claiming a tax deduction - can be made up to a total of $110,000 a year.
You can also make voluntary concessional contributions by having a salary-sacrifice agreement with your employer. These are taxed at just 15% like your Super Guarantee, so it's another way for you to get more dollars into your super fund and potentially pay less in tax.
The First Home Super Saver Scheme
Starting to grow your super early could help you to buy a house sooner, thanks to the First Home Super Saver Scheme (FHSSS). The FHSSS lets you save money for your first home inside your super.
Super is taxed at the concessional rate of 15% (compared to personal income tax rates which can be up to 47%), so first homeowners can save faster within super. You can only withdraw the savings you contribute - not your employer contributions, once you’re ready to buy a home. This restricted access can also help you with your savings discipline.
Besides the tax savings, the FHSSS can also help you earn higher returns on your saving. As at June 2023 the earnings rate for the First Home Super Saver Scheme withdrawals is 6.46%. This compares to the RBA’s cash rate of 4.10% which is often similar to interest earned in a bank account.
To make the most of this you can make contributions into your superannuation account, with a limit of $15,000 a year and up to a maximum of $50,000 in total. Then, when you are ready to buy a house, you apply to release your voluntary contributions and the related earnings (up to $50,000 in contributions plus the returns).
Other ways to make the most of superannuation
In addition to voluntary contributions, you may be able to take advantage of government co-contributions to maximise your super. For example, if you earn less than $58,445 p.a. (before tax) between 1 July 2023 – 30 June 2024 and make after-tax super contributions, the government could pay as much as $500 in co-contributions into your super.
As a young professional, you’re well placed to benefit from superannuation, so consider incorporating a super strategy into your long-term financial plan. Making voluntary, extra contributions at the start of your career also gives your money a longer time frame to grow. Additionally, initiatives like the FHSSS and other government initiatives could help you leverage super to buy a home and save on tax.
At Professional Super, we know that being a young professional isn’t always easy, so it’s important that you make the most of the benefits that come from super. Contact our team to find out more about these benefits.
Information in this post is current as at the time of publishing (01/07/2023) but may cease to be so in the future. Financial and taxation information, and statistics can change over time.
