Question 1: I contribute $200 per fortnight into superannuation. Would it be better to pay it into my mortgage instead? I still have about five to seven years of working.
This is a very common question: Should I pay additional money off my mortgage, or tip money into my super?
The below factors should be considered before making a decision:
- Do you have your mortgage repayments under control, allowing for interest rate increases of up to two or three percentage points?
- If no extra repayments are made, what would be your outstanding balance at retirement? You can use Moneysmart’s mortgage calculator to work that out
- Is there an immediate need to repay your mortgage, i.e. did you want to use the equity in your home for another investment?
- Do you stress that you still owe the bank money, or are you relaxed about this?
- Are you on track to meet your retirement income needs? Have you set a desired retired income? Again, Moneysmart have a good retirement calculator that estimates your retirement income based on your super and potential age pension benefits
- Is it likely you will need to access these funds again prior to retirement, bearing in mind funds contributed to super are preserved?
- What marginal tax rate are you on? The higher your tax rate, the greater the tax benefit you would receive by salary-sacrificing to super
- What asset allocation/investment approach does the investment option within your super fund take? Is it a ‘balanced’ option, and are you comfortable with short-term market movements?
In summary, without knowing your answers to the above questions and at a high level only, making super contributions over mortgage repayments makes sense when:
- You are close to retiring, as funds won’t be locked away for too long
- You are retiring over the age of 60, at which point you can withdraw some of your super tax-free to pay off the remainder of your home loan
- You are on a middle-to-high marginal tax rate, so you can gain additional tax savings through salary sacrificing
- Generally, over a five- to seven-year period, your super fund should outperform the interest rate on your mortgage, even if rates go up a couple of percentage points from where they are now.
Conversely, paying down your mortgage rather than contributing extra to super makes sense when:
- You are young and shouldn’t be locking away too much of your funds in super
- You are very conservative and want a guaranteed return, i.e. whatever your mortgage rate is
- You have a large loan and/or are behind in your repayments
- Having debt sits poorly with you and paying it off would provide a huge mental relief.
A financial adviser can help you articulate your personal goals and prioritise what is most important to you as well as run some financial modelling comparing the numbers.
Question 2: My husband is on the full age pension and I am under the pension age now. We are planning to sell the family home and move into my daughter’s unit rent-free when I reach the pension age. We will expect to receive about $600,000 from the sale of the family home. Can I put some money into my super account and still receive the pension?
Yes, you can make a non-concessional (after-tax) contribution to super of up to $330,000 (depending on your total super balance). Additionally, you may be eligible to make a ‘downsizer’ contribution to super of up to $300,000.
To be eligible to make a downsizer contribution you must have held the home for at least 10 years, and for at least part of this period it must have been your principal residence.
Currently you need to be 65 or older to make a downsizer contribution, but from July 1, you can make this type of contribution from age 60 – and the Coalition has announced plans to drop this age further to 55.
Your husband may be eligible to contribute the remaining proceeds of sale into super as well on July 1, 2022.
Any money held in your super fund will not count in the income or assets test for your husband until you attain your age pension age. Therefore, this may provide an opportunity for your husband to maximise his entitlements until that time.
Once you attain age pension age, all of your and your husbands’ assets, including your super, will be combined to work out your age pension entitlements, if any.
I would recommend seeking personalised financial advice to ensure your retirement income needs are continued to be met once you sell your home and reach age pension age.
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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