Investing your money – shares or super?

You probably already know we’re big fans of share investing. Whether your goal is capital growth or a steady passive income via dividend payments , investing in the share market is a popular way to work towards long-term wealth.

On the other hand, super is a means of saving for retirement. The money within your super is invested by your super fund, to grow your balance to help you support your lifestyle once you stop working. Your super fund might invest in a range of assets, including shares, property, fixed interest and cash.

If you’re employed by an organisation, your employer pays mandatory contributions of 11.5% of your salary into your chosen super fund. However, you can also make voluntary contributions to boost your super ahead of retirement.

In Australia, you’re allowed to contribute up to $30,000 of your income to your super each year; this is known as salary sacrifice.

Voluntary contributions may just be the reason you’re here. Perhaps you're tossing up whether you should put some extra money into your super or invest in the share market, or split your investing budget across both.

Here’s what to consider.

What are the advantages and disadvantages of investing in super?

As with any investment, putting your money in super has several pros and cons.

The benefits of investing in super

You may pay less tax

Many Aussies choose to make voluntary super contributions because they can provide significant tax savings. Voluntary contributions are taxed at only 15% – less than the bottom income tax rate of 19% and considerably lower than the top rate of 45%. (This is unless you're a high-income earner, but more on that below.)

You can access a greater diversity of investments

Compared to the share market, you may be able to access a wider range of asset classes via your super – such as property, infrastructure and private equity. This could mean your money is spread across a greater diversity of investments.

The benefit of diversification is that it often results in a more stable investment. Because your money is distributed among multiple assets, it may be better able to better withstand any volatility that affects certain holdings.

You often need to invest less time

Between super and shares, the former tends to be the less labour-intensive option.

First, you program your investments depending on how aggressively you want to invest before you retire. You can generally go for high-growth, moderate-growth, balanced and conservative investment options, or a mix. Your super balance is then invested on your behalf by your super fund, unlike shares, which you need to buy and sell yourself.

Note that it’s still worth monitoring your super investments until you retire to ensure they’re performing and helping you reach your superannuation goals.

The drawbacks of investing in super

You usually can’t access your money until preservation age

The whole point of superannuation is that it provides you with money to live on when you retire. Under current rules, you can’t access your super until you hit what’s known as preservation age . This may be 55 to 60 years old, depending on when you were born. You may even have to wait until you’re 65 if you’re still working.

There are a few special circumstances where you can access your super early – for example, an incapacity to work, severe financial hardship, or a terminal illness or injury. But in most cases, you’ll have to wait.

You have more limitations

While you do have a certain level of autonomy when choosing your investment style, many funds don’t allow you to select the actual shares or other assets you invest in. This means you may be limited in terms of your investment options.

Also remember that you’re restricted to investing up to $27,500 to enjoy the lower tax rate of 15%. After this, you’ll be taxed at your marginal tax rate.

Plus, the tax rate of 15% only applies if you earn less than $250,000 per year. If you’re earning more than this, you may be liable for an additional 15% tax – or 30% in total. (Note that this is still lower than the current marginal tax rate of 45% for those who earn $180,001 or more.)

Taxes can be complicated, and this information is only general in nature. Reach out to an accountant if you want advice on your situation.

What about investing in shares?

Share investing also comes with its advantages and drawbacks. Here are just a few of them.

The upsides of share investing

Your money's more liquid

Unlike your super balance, which can generally only be accessed once you reach preservation age, you can get your hands on your share investments whenever you want.

You can buy, sell and withdraw your investments entirely at intervals that suit you, making your share investments much more liquid. This is particularly advantageous if you want to use your investment money to fund aspects of your current lifestyle. These could include living expenses, holidays, or bigger and more immediate goals, like a property deposit.

You have greater autonomy

As a share investor, you can choose exactly what you want to put your money into: individual stocks, ETFs , managed funds and more. You can also invest in foreign markets , including the US and emerging markets . Plus, you can choose how much you want to allocate to certain assets.

Potential for dividends

Some shares pay dividends, which are regular payments given to shareholders if and when a company does well. The primary advantage of dividends is that they act as a passive income stream. You can then use this income on things like day-to-day expenses, or even to reinvest.

On the flip side, you won’t get any regular payments from your super – even if the investments within your fund perform strongly.

The possible downsides of investing in shares

Taxes and fees

The money you make from investing in shares – like capital gains when you sell or dividends you receive – is just another form of income. This means it’s taxed the same way as money you earn from your job.

Any money you receive from your shares in a particular financial year will be added to your assessable income at tax time . This could potentially result in paying a higher amount of tax.

You should also consider the fees associated with share investing , like brokerage and management fees. These can eat into your wealth over time, especially if you’re buying and selling frequently.

You’ll spend more time on the process

Investing in shares is probably the more research and knowledge-intensive of the two options. Advantages like greater autonomy in terms of investment options and amounts, and the ability to buy and sell ad hoc, require a level of understanding.

As a result, you may have to be more hands-on with share investing than you would with investing in super. This can mean more time and energy on your part.

Important things to consider before deciding where to invest

Before you choose where to put your money, ask yourself these crucial questions.

What are your goals?

Are you hoping to build a bigger nest egg to enjoy a more comfortable retirement in your 60s? If so, you may benefit from making extra contributions to your super .

Or, are you planning to use your investment strategy to save up for, say, a house deposit? In that case, you might need more liquidity, which is why shares could be the more straightforward option.

Think about what you’re ultimately aiming towards and consider this goal when deciding where to invest.

When do you want to retire?

Your investment horizon – how long you want to hold on to your investments – is another major factor.

If you’re aiming to stop working at a younger age and achieve FIRE (Financial Independence Retire Early) , shares may provide you with more immediate returns. You can access your money whenever you choose, meaning you’re not restricted by the age limits imposed by the current superannuation rules.

Alternatively, if you’re planning to retire around preservation age and have several decades ahead of you, you might be able to wait to access your investments.

How much do you want to retire on?

How much super should you have when you retire? Would you be satisfied with $500,000 in retirement money, or do you anticipate requiring much more?

Start by working out roughly how much you expect to live on every year once you retire. There are various factors to consider here, including whether you own your home (and if you’re likely to continue paying off your mortgage during retirement) and what kind of lifestyle you want.

Then, look at your current super balance and contributions and figure out whether you’re likely to meet your retirement target. Depending on how long you have until retirement, investing in either super or shares may make more sense.

Want some help crunching these numbers? Try Pearler's Financial Independence calculator .

Will you need to access your investments before you retire?

As mentioned earlier, you might be investing for your immediate circumstances. Perhaps you want to fund your day-to-day or discretionary spending, or maybe you’ve got a shorter-term savings goal such as a holiday or home deposit.

The money you put in shares can more or less be accessed whenever you want, whereas you’re not granted the same freedom with superannuation.

How much do you want to invest?

We know there are limits on how much you can put into your super before being taxed at a much higher rate. There's also an additional tax if you’re earning over $250,000.

If you want to invest large amounts, share investing could potentially prove more lucrative. On the other hand, if you only want to invest a small amount, the fees associated with share investing might make your investment quite prohibitive.

What’s your risk profile?

Shares are inherently riskier than super, so it’s well worth assessing your risk profile. This is effectively a measure of how much risk you’re willing to take on, and it helps you determine what to invest in and how much to invest.

Generally speaking, the higher the risk, the higher the potential for strong returns. At the same time, there’s a higher chance of losing your money.

If you have a low tolerance for risk, you may prefer more conservative and historically stable investments – like blue chip shares , diversified ETFs , or your super. But if you’ve got a higher risk appetite, you might be willing to put your money into more volatile investments like growth stocks or funds.

How will your investment affect your taxes?

There are different tax implications for investing in super versus investing in shares, which we’ve already outlined. Chat to your accountant to see how either option will affect your tax position.

The bottom line

At the end of the day, the decision on where to invest is entirely yours. You could put that extra money into your super as voluntary contributions, or you could invest in the share market.

Or, you could do a mix of both – potentially allowing you to reap the benefits of each investment option while minimising the drawbacks.

Seek advice from a licensed financial adviser, who can guide you on the best investment strategy for your circumstances.