Shares versus superannuation: Where should you invest?
Investing through superannuation comes with tax benefits, while investing through your own share trading account will allow you to access the funds whenever you like.
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Buying shares and adding money to your super are both a form of investing, and each option comes with its own advantages and disadvantages. Let's go into the differences between these investment options in more detail, and weigh up the pros and cons of both.
Investing in shares
When you purchase shares, you get part ownership (or a share) of a particular company. When a company performs strongly, the price of its shares rise. This is good news for investors as the value of their shares has increased. This is referred to as capital growth, and means that you can sell the shares for more than what you initially paid for them. However, if the company performs poorly, the value of the shares decreases.
In addition to the value of the shares increasing, many companies will also pay shareholders a dividend, which is basically a share of the company's profits. The amount you receive as a dividend payment will be directly related to how many shares in the company you hold. If you invest in enough shares, you could create a second income stream out of the dividend payments alone.
Investing in shares over your super: pros and cons
Pros
- Individual ownership of the shares.
- You can get dividend payments into your bank account as a form of income.
- You get capital growth (unless the shares fall in value)
- You have complete control over your investment decisions.
- You can sell, or buy, at any time.
- You can act on investment opportunities quickly
- Capital losses on shares can be used to offset capital gains in your tax return.
Cons
- Shares are less diversified than superannuation.
- Shares are a higher risk option.
- They require a greater level of engagement and more expertise, and you need to manage the tax obligations yourself.
- It's more expensive as you need to pay brokerage fees for each trade you make
Investing in shares may suit you if...
- You want to have access to the money before you retire
- You want to have complete control over the individual shares you buy and sell, and the timing of your trades
- You want to earn a regular income stream in the form of dividends
- You're comfortable taking on more investment risk and understand how the stock market works
Investing in your superannuation
Superannuation is a way to save for your retirement. Your super fund is basically one big investment portfolio that's managed on your behalf by professionals. Your employer is required by law to pay a portion of your earnings into your designated super fund (this is called the super guarantee). The money in your superannuation is invested into various assets, including shares, with the main aim of growing your balance over time.
As the main purpose of superannuation is to fund your retirement and to be a substitute for the Age Pension, you typically cannot access it until you're retired. There are some rare situations where you're able to access your super early, but generally you can't access it while you're working and under 65.
Benefits of investing in super
There are tax benefits to investing inside the super environment. You can contribute up to $27,500 a year as a concessional contribution into your super. A concessional contribution means the money will be taxed in your super fund as the lower rate of 15%, instead of your standard income tax rate.
Investing in your super over shares: pros and cons
Pros
- Your super is managed for you, so it's less work.
- It's a more diversified portfolio than shares alone.
- There is less risk involved.
- You benefit from long-term growth.
- Concessional super contributions are taxed at the lower rate of 15%.
- You can reduce your taxable income by salary sacrificing into your super
Cons
- You cannot access the funds until you're retired.
- If you're in a pre-mixed fund (such as a Balanced or High Growth fund), you can't pick individual shares to invest in.
- You can only make $27,500 worth of concessional contributions (pre-tax contributions) into your super per year.
Investing in your super may suit you if:
- You want to set up a salary sacrifice arrangement and reduce your taxable income
- You want to build long-term capital growth and don't plan on using the money in the short term
- You don't need to have control over the specific investment decisions, and want more of an automatic, set-and-forget strategy for building wealth
Could you be getting better returns from your super?
Shares versus super: What to consider when choosing
There are a few factors to consider when deciding to invest in shares or contribute to your super.
Economic conditions and your investment timeframe
Shares and super are both dependent on wider economic conditions. Both are investments so the performance returns can change depending on the economy. That's why when you have shares and/or super, it's best to regularly check the performance of the company and the super fund so you know your money isn't losing value.
Super is a long-term investment that's very diversified, so short-term declines and dips in the economy won't affect it too much unless the economy continues to decline. The long-term nature of super means it is well placed to ride out any waves and dips in the market.
However for some shares, if it's a short to medium-term investment, the direct impact of market conditions can seriously affect the value of your shares. This is especially true in a volatile market or during times of economic or political uncertainty. However, if you plan to hold your shares for the long term (for example 7-10 years or more), your investment will be better placed to overcome small dips in the market.
Diversification
Diversification is an important strategy for an investor to minimise risk. Superannuation is typically more diversified since it invests in a whole range of assets from cash and shares to property and government bonds.
However, you can still achieve a relatively diversified portfolio when investing in shares by making sure your investments are in different industries. For example, having a mix of Australian shares, international shares, shares in technology companies, shares in blue chip companies and even shares in companies that invest in shares (these are called Listed Investment Companies) and so on. That way, if the entire technology industry suffers, you don't have all your shares in that sector alone. However, this is still going to be a very high-risk investment portfolio as it's concentrated on shares.
Your risk tolerance
Typically, the more risk you're willing to take, the greater reward you get if all goes well. If you invest in shares, there is quite a lot of risk involved, especially if you are new to the stock exchange (if you are, you might enjoy our guide on how to buy shares online). Unless you have a financial adviser helping you through the process, you'll have to manage most of your shares yourself, which can be tricky when you're first starting out.
With super, your money is managed by the fund and it decides how to invest your money. There can be less risk involved with super since it's managed by a fund, but you still have the option of choosing a more risky option if you want it. That being said, you do have much less control with your super compared to buying shares directly.
However, while shares may be more risky, there's also the potential to earn more money in the form of dividends or capital growth in the short term, which could be appealing. It depends what your strategy is, and what you want to achieve from your investment.
Your investing expertise
Your level of investment expertise may affect your decision as to where to invest your extra money. Superannuation is managed for you on your behalf, so if you have no investment experience and aren't interested in learning, it could be best to contribute to your super instead of buying shares.
However, if you do have some investment experience or have done some research, shares could be a great option. Just be prepared to stay engaged. This means monitoring the share price, keeping up-to-date with the company and staying on top of broader market and economic conditions.
Your age matters
Age is a big factor when determining if you should go for shares or put your money into your super. Anyone who owns shares will receive their returns without restriction. You may receive dividends or sell your shares for a higher price whenever you choose. Theoretically, shares are a long-term investment if you want to make a decent return, so investing in shares when you're about to retire may not be a good idea.
On the super side of things, you have to wait until you retire before you start accessing your benefits. So if you're young and want to access your returns immediately or sooner rather than later, investing in shares may be a better idea. However, if you prefer to save for a more comfortable retirement, putting your money into super will be a better way to guarantee safer returns.
Why not have both?
If you've made it this far in the guide and still haven't made up your mind, remember, there's nothing stopping you from doing both. You can invest some money in shares and also into your super, and use both these strategies side-by-side to build your wealth.
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Ask an Expert
I have only 25,000 in my super. I need to try and grow my super. It’s with ANZ Bank and it’s not making anything. Do you think putting some money in shares make my money grow? I’m 59 years old and need to make this money grow can you help me?
Hi Edward,
Thanks for getting in touch with Finder. I hope all is well with you. :)
Whether to transfer your money from your bank account to shares or not would depend on your needs, preference, and budget. However, at this point in time, it would be a good idea to consider the pros and cons of each of your options.
For example, when you invest in shares, bear in mind that it takes years for your money to grow. Not only that, but you also need to remember that like any investment, your money in shares can increase but it can also decrease.
Please make sure that you consider the risk of buying shares. If it is a risk that you can afford to take, then, by all means, you might want to get into share trading.
If you want, you can also speak to share trading experts. They should be able to give you more pieces of advice to help you make a better decision.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua
Dear Sir/Madam,my wife and l a.own our own home b.my wife has an investment property(positively geared..value $400k..mortgage $220k.) c.we are selling a property and should have circa $150,000 net d.our combined super is circa $1 mill. My wife(58) is undertaking transition to retirement(a teacher with defined benefit super)I,m 59 self employed…and love my work!…..q. a.should we invest the $150k into our separate super fund($75k each) or purchase a house(we live close in Toowoomba and could purchase a rental property for under $400k..q.b.with all the doom and gloom scenarios re. world economy do you believe we shall be able to have a good quality of life in retirement..? We are conservative folk from humble origins with simple tastes but do like to travel os….your counsel is valued, cheers
Hi Kev,
Thanks for your inquiry and sorry for the delay. Just to confirm that you’ve reached finder, a leading comparison website, and general information service. We’d be glad to offer you general advice to answer your questions.
As we are not financial experts, we may not be able to advice as to how and when is the best time you can invest your super. It would be best that you speak to a financial planner who can help you achieve your financial goals and understand your needs. We have a guide about seeking financial advice which you may find useful.
Cheers,
May
i am 62 thinking to retire .my husband 8=69. have b2 investment properties worth $1700.000 with a loan of $1000.000.want to sell one property ,but scare about c g t.How can avoid that capital gains tax
Hi there,
Thanks for your comment. We are a comparison website and as such, can provide general advice only. If you have any concerns or would like to discuss your personal situation in more detail, we recommend speaking to a financial planner.
Regards,
Clarizza