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Should I be boosting my super or just focusing on the mortgage? I’m 55, and we still have around $200,000 to go on our mortgage. I’m wondering whether I should put all my savings into super, then withdraw a lump sum when I retire and pay off the mortgage. I think I’d save tax doing it that way. Am I on the right track?
Thanks for a great question. Let’s start with the basic differences.
Paying extra off your mortgage involves using after-tax money. It produces a saving to you in the amount of interest you pay on your mortgage and will result in your mortgage being paid off sooner than would have otherwise been the case, freeing you up from mortgage repayment commitments.
When making contributions to your super fund, it’s important to work within the constraints of your contribution cap.Credit: Simon Letch
Paying extra to super will usually involve pre-tax money, most commonly using salary sacrifice. Once the money is in super it is invested and will grow. A 15 per cent tax is applied when the money arrives in your super fund, and earnings are taxed at a maximum of 15 per cent.
Then, when you are ready to retire, you can draw down from your super tax-free, provided you are at least 60 years of age. Typically, we draw down a regular income from super, but you are quite right in recognising that you could withdraw a lump sum to clear your remaining mortgage.
Before we move on, I want to ensure the significance of the pre versus post-tax difference is not overlooked. If you have a savings capacity of $1000 per month, you could direct that to your mortgage, or (for someone on $90,000 per year) you could salary sacrifice $1481 into superannuation because this contribution occurs before tax.
Your super contribution is then taxed at 15 per cent when it arrives in the fund, so your ultimate super contribution is $1259. For the same out-of-pocket cost to you, your super fund receives an extra $259 each month. This is meaningful.
These types of superannuation contributions fall into the category of “concessional contributions”. Your employers’ contributions also fall into this category. The current annual limit for concessional contributions is $27,500. On considering whether to direct savings to super, you need to first determine how much room you have within your cap.
There is the ability to make use of prior years’ unused caps, which can be very handy. Log into your MyGov account to check what you have available here. The need to work within the constraints of your contribution cap may help you rule out one approach.
If you were to focus all of your savings on paying down your mortgage, you will get your mortgage paid off sooner. You could then direct your savings, plus whatever you were previously paying into the mortgage, into super.
The problem with this approach is that you will almost certainly run out of contribution cap room. You can make extra super contributions with after-tax money, which has a much larger annual cap of $110,000 per year, but it’s less advantageous for you.
Likely then the best approach is to contribute to super up to your concessional cap, and then direct the remainder of your savings to your mortgage.
To determine a definitive answer, we’d need to crunch your specific numbers, as factors like the mortgage interest rate, your income level and resultant marginal tax rate, the investment mix of your super fund, and your age to retirement are all factors that need to be considered.
Paul Benson is a Certified Financial Planner, and host of the Financial Autonomy podcast. Send your questions to: [email protected]
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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