Question 1: I’m a 45-year-old married female with approximately $155,000 in super and a $250,000 mortgage. I started this year adding an extra $7500 into my super for the year and paying an extra $1800 per month on top of my mortgage. My husband has about the same in super but is on a lower income than me. Should we continue to pay down our mortgage, or add more to our super? We don’t anticipate retiring until we’re over 65 years old.
Question 2: I am a single person aged 55 with a super balance of $122,000. I have a mortgage of $117,000. I am paying off an extra $400 a month on my mortgage and at this rate should have the mortgage paid off within the next seven to nine years. I am now wondering if I would be better off paying that extra into my super.
Similar to the above two, a common question I receive is: ‘Should I pay off my mortgage faster or put extra into super?’
Paying off the mortgage faster
Making extra mortgage repayments can provide a lot of psychological benefits.
Seeing your mortgage get smaller, and then becoming debt free, is a great feeling.
It also provides you with flexibility in that you may be able to redraw your extra payments if required, and it’s nice to know that you can do this if an emergency arises.
It also provides you with more equity in your home, which can be used for other investment purposes, such as buying an investment property.
It’s also a very safe and conservative strategy. It doesn’t matter what investment markets are doing, when you are paying down debt, it’s always becoming smaller.
Being ahead on your mortgage repayments also creates a nice buffer.
If you fall on hard times, you can reduce the repayments and still be ahead overall.
But from a purely financial sense, it is most likely not the best strategy.
Making additional super contributions
Making additional super contributions and saving for retirement offers great tax advantages and incentives.
This is especially true for most people who make pre-tax contributions via salary sacrifice.
On top of this, the investments held within super should outperform today’s very low mortgage rates.
Let’s look at an example.
Adam and Amy both earn $80,000 a year.
Their marginal tax rate is 34.5 per cent, which includes a Medicare levy of 2 per cent. (This tax rate is applied to all taxable income between $45,001 and $120,000 for 2021-22.)
Let’s assume they each have a mortgage of $400,000, are paying $3000 per month at an interest rate of 2.32 per cent, and both have $100,000 in super.
A ‘gross’ (before-tax) income of $80,000 equates to a ‘net’ (after-tax) income of $63,013.
Both Adam and Amy have $1000 in surplus income every month.
Adam uses the surplus to pay off his mortgage while Amy puts it into her superannuation. Let’s look at the results, based on ASIC’s Moneysmart mortgage calculator:
Adam: By diverting an extra $1000 per month to his mortgage, Adam cuts the loan term from 12 years and 11 months, to nine years and four months. This cuts the amount he pays in interest by $18,651.
Amy: By salary sacrificing into her superannuation, Amy saves on income tax so can afford to contribute $1536.45 each month to super and still have the same net income as Adam.
By salary sacrificing $1536.45 each month for nine years, Amy could an extra $143,103 to her superannuation.
This is based on Moneysmart’s default assumptions that a super fund would charge an annual admin fee of $84, deliver an average annual return of 7.5 per cent less investment fees of 0.85 per cent, and have their earnings taxed at a rate of 7 per cent.
As you can see, the superannuation strategy provides a much greater financial benefit.
But the funds will be locked away in super until retirement, thereby proving less flexibility, and the returns are not guaranteed.
Salary sacrifice contributions will generally provide a better long-term financial outcome than additional loan repayments especially in a low interest rate environment.
However, as outlined above, this strategy provides less flexibility and you may have other reasons to prioritise your mortgage.
As a general rule, if you are young and have a large mortgage, making additional mortgage repayments would be a prudent strategy.
But as you age and get your mortgage under control, splitting your surplus income between additional mortgage repayments and superannuation may be a good idea.
Once you are into your fifties, it makes sense to build up your super via salary sacrifice contributions.
That said, your personal circumstances and goals may lead to a different conclusion, and I would encourage you to seek personalised financial advice.
Finally, the most important thing is to spend less than you earn so you can at least do something, whether that’s repaying the mortgage, saving towards retirement, or putting the funds towards any other worthwhile goal.
Question 3: My wife has a super balance of $300,000. I have a balance of $600,000. I have recently sold a rental property, and wish to contribute to my wife’s super balance from the proceeds, via super contribution splitting.
She has an unused concessional contributions cap of $47,000. As I am over the $500,000 superannuation balance limit, I am unable to utilise bring forward concessional contributions amounts. Is it mine, or my wife’s concessional contributions limit, which determines how much can be contributed?
Is it possible to contribute an amount equivalent to the sum of mine and my wife’s limit, and then split an amount equal to my wife’s limit, taking into account the 85 per cent limitation?
You are correct in that you have a standard concessional contribution cap of $27,500 for 2021-22, as your super balance is over $500,000.
Any SG, personal tax-deductible, or salary sacrifice contributions you make count towards your concessional cap, regardless of whether you then subsequently use the super splitting rules to transfer up to 85 per cent of these contributions to your wife.
Therefore, to use your wife’s larger concessional cap, she needs to make the salary sacrifice or tax-deductible contribution directly into her super account.
A few other points worth noting:
- You could still contribute up to your annual concessional cap and split 85 per cent across to your wife, if you wanted to look at evening your super balances
- If your investment property made a capital gain, then depending on whose name it was in, you should also factor in the tax consequences and whether you should be making tax-deductible contributions to super to lower your tax
- If the contribution was made directly into your wife’s super account, she may be eligible to claim a tax deduction on that contribution, not you, as the funds are going into her account
- You may be eligible to make after-tax contributions to super and, between you and your wife, get up to $660,000 into superannuation. However, you won’t be able to claim a tax deduction for these contributions, but it can place your retirement funds in a tax-effective environment.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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