Why investing in shares and super are basically the same thing

A lot of people I talk to have a similar question, “should I invest in shares or super?”

This can be a bit of a tough one to answer because there is a lot of nuance to this question.

In this blog article, I’ll break down how I think about this question and how to address it.

What is superannuation?

Superannuation was put in place to supplement or replace the Centrelink Aged Pension.

Because of this, most people tend to think of it as some sort of government account that the government has access to. But this isn’t the case.

Your superannuation is essentially just a share portfolio that has been set up for you, with some additional tax and access rules.

Because it’s a share portfolio, you have complete discretion about what it’s invested in and with which company. There are some restrictions but overall, it’s quite flexible.

For example, the company my super is set up with also has the ability to set up an investment portfolio outside of super (which I’ve done).

Because I’m investing in my share portfolio and super for similar reasons (i.e. to have money later in life), my superannuation and my investment portfolio is invested in the exact same investment.

If your super and an investment portfolio are the same investment, then how are they different?

Superannuation is not an investment type; it’s a tax structure.

It’s a place you can hold your shares and receive favourable tax treatment. The flip side of this favourable tax treatment is you give up access rights until later in life.

If you have share investments OUTSIDE of super, you can access them at any time.

The downside is that you are getting taxed at your marginal rate on the income received from your investments and at the capital gains rate for capital gains.

If you have share investments INSIDE of your super, it’s locked away until you meet a condition of release (usually 60+) but you are getting taxed at superannuation tax rates (which are usually lower).

Should I expect a better investment return from shares or super?

Given they are both just an investment portfolio, if you were invested in the same thing, you could expect the exact same investment return from your shares and your super.

Where they differ however, is your super tax rate may be lower so the return may be greater after tax.

One thing to note though is the tax you pay on your super investments comes out of your super account. The tax you pay on your investment portfolio is usually paid from your cashflow.

This can make it seem like your investment portfolio is doing better as it isn’t constantly having tax money taken out.

Should you invest in shares or super?

So going back to the original question, should you invest in shares or super?

In responding to this question, I’m approaching it on the basis that they are both just an investment portfolio.

The real distinguishing factor here is when do you want access to your money and how much tax are you willing to pay for this access.

If your goal is to invest for the long-term and not access your money until after age 60, then maybe focusing your money in super might make the most sense so you can save on tax.

If your goal is to access your money prior to age 60, then perhaps investing in a share portfolio makes more sense. You may pay more tax, but the access will be worth it.

For some people, we will do a combination of both.

Both of these options are almost entirely based on your age and tax rates.

If you’re 20 and not earning a lot, then putting money in super comes with some serious downside as you can’t access it until you’re 60 (on the current rules).

But if you’re 55 and a high income earner, then this downside is a lot lower and maybe we want to focus your investment in super.

If you’re looking for an expert to help map out a detailed financial plan which makes sense from a tax perspective, then please reach out. We have clients all over Australia and would love to hear from you.