You might want to pay off your home loan, take a holiday or put the money towards your children’s education. You may also want to consider how you could use your inheritance to make a difference to your retirement.
These measures became law in late November 2016, and took effect from 1 July 2017:
- Concessional or before-tax contributions: Current annual limits of $30,000 (and $35,000 for people aged 49 years and over) will be reduced to $25,000 across the board.
- Non-concessional or after-tax contributions: Current general threshold of $180,000 a year will be cut to $100,000 a year if you are under 65. As before, you are allowed to “bring forward” three years’ worth of contributions to a single year, but you can now contribute only up to $300,000 in one year.
- A $1.6m lifetime cap on amounts moving into the tax-free retirement phase. This means you may have to remove any excess money if your personal pension assets exceed $1.6m, or additional tax rates may apply.
- The income threshold that will trigger an additional 15% tax on concessional contributions is lowered to $250,000 from $300,000.
While you’re thinking about your options, putting the funds in a term deposit or high interest savings account may offer a higher interest rate.
Choosing what’s best will depend on your level of debt and income, appetite for risk and overall financial situation, including how close you are to retirement.
So what are your options?
1. Pay off your debts
Getting rid of debts can reduce your financial stress now and in the future. It’s wise to pay off non-deductible debts with the highest interest rates first, like credit cards, car or personal loans, store cards and short-term loans.
2. Make voluntary contributions to your super
Putting money into super can be a tax-effective way to increase your wealth and save for retirement. There are rules around super contributions. For example:
- Contributing inheritance will generally be counted as a non-concessional (after-tax) contribution
- You could choose to keep the inheritance outside super and set up an arrangement with your employer to contribute more to super from your before-tax income – also known as concessional or salary sacrifice contributions.
- Concessional contributions don’t attract income tax and instead are generally only taxed at 15%. This means you could lower your taxable income. Money you draw from your inheritance could supplement the income you sacrifice.
It’s also important to remember that money you put into super is generally not able to be accessed until after you retire.
You can check the Australian Taxation Office website for the latest details about superannuation contributions.
Keep in mind that the money you put into super may be invested in a range of asset classes such as cash, fixed interest, shares or property, so your super can be affected by market movements.
3. Invest in shares or property outside super
Depending on how comfortable you are with taking investment risks, you could invest some of your money in assets with the potential to grow in value, like shares or property. So how much risk should you take?
Shares and property are two key investment types, sometimes referred to as asset classes. Others include cash and fixed interest.
All investment types carry their own risks and benefits and if you invest in a mix of them, you may be able to minimise the chance that all your investments will perform poorly at the same time. This is what’s known as diversification.
It’s important to understand the risks involved and seek advice if you’re not sure.
Investing in property
What are some of the benefits of property investment?
- The rental income you receive can potentially cover your loan repayments
- You may be able to claim a tax deduction for some of your expenses
- It can offer a lump sum payment if you decide to sell
What do you need to consider when investing in property?
- You will need to pay tax on any income you make
- There are high buying costs, including stamp duty
- If you have a variable rate loan and interest rates go up, so do your repayments
- You run the risk that your property may decrease in value
Investing in shares
By buying shares you are buying part ownership of a company. If the company performs well, you can benefit from share price growth. Equally, if the company performs poorly, your share performance will suffer.
What are some of the benefits of shares?
- They can be bought and sold quickly with relatively low transaction costs
- Potential returns from shares include an increase in the share price, also known as capital growth
- You may make a capital gain, where you sell your shares for more than you paid for them
- Some shares also pay income in the form of dividends, which are distributions paid out of the company’s profits to its shareholders
What do you need to consider when investing in shares?
- Markets can be volatile, meaning share prices can fluctuate frequently. This is why shares are considered a higher risk investment
- Brokerage fees – these are what you pay when you buy and sell shares. You’ll need a broker, which can be an online trading platform or a stockbroker
Any form of investment has its benefits and risks. A financial planner can help you decide what your best options are according to your needs and circumstances.