Tag Archives: Retirement Planning

Mortgage versus super – a common dilemma

By Robert Wright /August 23,2024/

Conventional wisdom used to dictate Australians were better paying off their home loans, and then, once debt free turning their attention to building up their super. But with interest rates ramping up over the past two years and uncertainty as to when they are likely to reduce, what’s the right strategy in the current market?

It’s one of the most common questions financial advisers get. Are clients better off putting extra money into superannuation or the mortgage? Which strategy will leave them better off over time? In the super versus mortgage debate, no two people will get the same answer – but there are some rules of thumb you can follow to work out what’s right for you.

One thing to consider is the interest rate on your home loan, in comparison to the rate of return on your super fund. As banks ramped up interest rates following the RBA hikes over the past two years, you may find the returns you get in your super fund has potentially shrunk in comparison.

Super is also built on compounding interest. A dollar invested in super today may significantly grow over time. Keep in mind that the return you receive from your super fund in the current market may be different to returns you receive in the future. Markets go up and down and without a crystal ball, it’s impossible to accurately predict how much money you’ll make on your investment.

Each dollar going into the mortgage is from ‘after-tax’ dollars, whereas contributions into super can be made in ‘pre-tax’ dollars. For the majority of Australians, saving into super will reduce their overall tax bill – remembering that pre-tax contributions are capped at $30,000 annually and taxed at 15% by the government (30% if you earn over $250,000) when they enter the fund.

So, with all that in mind, how does it stack up against paying off your home loan? There are a couple of things you need to weigh up.

Consider the size of your loan and how long you have left to pay it off

A dollar saved into your mortgage right at the beginning of a 30-year loan will have a much greater impact than a dollar saved right at the end.

The interest on a home loan is calculated daily

The more you pay off early, the less interest you pay over time. In a higher interest rate environment many homeowners, particularly those who bought a home some time ago on a variable rate, will now be paying much more each month for their home loan.

Offset or redraw facility

If you have an offset or redraw facility attached to your mortgage you can also access extra savings at call if you need them. This is different to super where you can’t touch your earnings until preservation age or certain conditions of release are met.

Don’t discount the ‘emotional’ aspect here as well. Many individuals may prefer paying off their home sooner rather than later and welcome the peace of mind that comes with clearing this debt. Only then will they feel comfortable in adding to their super.

Before making a decision, it’s also important to weigh up your stage in life, particularly your age and your appetite for risk.

Whatever strategy you choose you’ll need to regularly review your options if you’re making regular voluntary super contributions or extra mortgage repayments. As bank interest rates move and markets fluctuate, the strategy you choose today may be different from the one that is right for you in the future.

Case study where investing in super may be the best strategy

Barry is 55, single and earns $90,000 pa. He currently has a mortgage of $200,000, which he wants to pay off before he retires in 10 years’ time at age 65.

His current mortgage is as follows:

Mortgage	$200,000
Interest rate	6.80% pa
Term of home loan remaining	20 years
Monthly repayment (post tax)	$1,526.68 per month

Barry has spare net income and is considering whether to:

make additional / extra repayments to his home mortgage (in post-tax dollars) to repay his mortgage in 10 years, or
invest the pre-tax equivalent into superannuation as salary sacrifice and use the super proceeds at retirement to pay off the mortgage.

Assuming the loan interest rate remains the same for the 10-year period, Barry will need to pay an extra $775 per month post tax to clear the mortgage at age 65.

Alternatively, Barry can invest the pre-tax equivalent of $775 per month as a salary sacrifice contribution into super. As he earns $90,000 pa, his marginal tax rate is 32% (including the 2% Medicare levy), so the pre-tax equivalent is $1,148 per month. This equals to $13,776 pa and after allowing for the 15% contributions tax, he’ll have 85% of the contribution or $11,710 working for his super in a tax concessional environment.

To work out how much he’ll have in super in 10 years, we’re using the following super assumptions:

The salary sacrifice contributions, when added to his employer super guarantee contributions, remain within the $30,000 pa concessional cap.
His super is invested in 70% growth / 30% defensive assets, returning a gross return of 3.30% pa income (50% franked) and 2.81% pa growth.
A representative fee of 0.50% pa of assets has been used.

If these assumptions remain the same over the 10-year period, Barry will have an extra $161,216 in super. His outstanding mortgage at that time is $132,662 and after he repays this balance from his super (tax free as he is over 60), he will be $28,554 in front. Of course, the outcome may be different if there are changes in interest rates and super returns in that period.

Case study where paying off the mortgage may be the best strategy

40 year old Duy and 37 year old Emma are a young professional couple who have recently purchased their first apartment.

They’re both on a marginal tax rate of 39% (including the 2% Medicare levy) and they have the capacity to direct an extra $1,000 per month into their mortgage, or alternatively, use the pre-tax equivalent to make salary sacrifice contributions to super.

Given their marginal tax rates, it would make sense mathematically to build up their super.

However, they’re planning to have their first child within the next five years and Emma will only return to work part-time. They will need savings to cover this period, as well as assist with private school fees.

Given their need to access some savings for this event, it would be preferable to direct the extra savings towards their mortgage, and redraw it as required, rather than place it into super where access is restricted to at least age 60.

Before weighing up your options and considering which approach may be right for you, talk to your financial adviser.

Source: AMP

Is it worth salary sacrificing into super?

By Robert Wright /August 23,2024/

Let’s explore the ins and outs of salary sacrificing into your super and help you determine if it’s worth considering as part of your financial strategy.

We’re all familiar with the concept of super. It’s that portion of our salary that employers are required to contribute to a super fund on our behalf, with the goal of providing us with financial security in retirement.

But what not everyone is aware of, is that relying solely on your employer’s contributions might not be enough to ensure a comfortable retirement. That’s where salary sacrificing into super comes into play.

What is salary sacrificing into super?

Salary sacrificing into super involves redirecting a portion of your pre-tax salary into your super fund. Instead of receiving this portion as part of your take-home pay, it goes straight into your super account.

Here’s how it works:

Agreement – You and your employer agree to salary sacrifice a specific amount or percentage of your pre-tax salary into your super fund. This amount is in addition to the compulsory employer contributions.
Pre-tax – The sacrificed amount is deducted from your gross (pre-tax) salary, reducing your taxable income. This means you pay less income tax on your take-home pay.
Super contributions – The sacrificed amount is added to your superannuation contributions, helping you build a more substantial retirement nest egg.

The benefits of salary sacrificing into super

Tax savings – One of the primary advantages of salary sacrificing into super is the potential for significant tax savings. The sacrificed amount is taxed at the concessional super tax rate of 15%, which is typically lower than the tax rate you pay on your income. This means you get to keep more of your money while still saving for retirement. You may pay additional 15% tax on all or part of your salary sacrifice if your income exceeds $250,000. In this case, the effective tax on your contributions may be up to 30%, which is still less than the highest tax rate of 45%.
Faster retirement savings growth – By contributing more to your super fund through salary sacrificing, you’re accelerating the growth of your retirement savings. Your money is invested over an extended period, potentially leading to more substantial gains through compound investment returns. Compound investment returns refer to earning money not just on the original investment but also on the accumulated growth gained over the period since the investment was made.
Lower taxable income – Since the sacrificed amount is deducted from your pre-tax salary, your taxable income is reduced. This can have several additional benefits, such as qualifying you for certain concessions, reducing the Medicare Levy and helping you stay in a lower tax bracket (salary sacrifice contributions are not subject to the Medicare Levy or the Medicare Levy Surcharge. This can lead to significant tax savings, especially for higher income earners.)
Automatic savings – Salary sacrificing is an automated process. The money is taken out of your pay before you even see it, which can help you build disciplined savings habits.
Long-term financial security – Salary sacrificing into super is a smart way to attain long-term financial security during your retirement years. It provides peace of mind, knowing that you’re taking proactive steps to build a comfortable retirement nest egg.

Things to consider before salary sacrificing into super

Contribution caps – The annual limit on the amount you can salary sacrifice into super without incurring additional tax in Australia is $30,000 from 1 July 2024. The cap limits change over time so it’s important to be aware of the current contribution cap limit. Those who have a superannuation balance of less than $500,000 on 30 June 2024 may have a concessional cap of up to $162,500 in 2024/25. This includes the annual $30,000 cap, $25,000 for 2019/20 and 2020/21, and $27,500 for 2021/22, 2022/23 and 2023/24. This is based on the five-year carry forward rules.
Your financial goals – Consider your overall financial goals when deciding how much to salary sacrifice into super. You should strike a balance between your short-term and long-term financial needs. If you have pressing financial commitments, it might not be wise to sacrifice too much of your current income. What kind of lifestyle do you envision for your retirement? The more comfortable you want it to be, the more you may need to save.
Reduced take-home pay – Salary sacrificing means you’ll have less money in your take-home pay. This can be challenging if you’re on a tight budget or have immediate financial needs, such as your mortgage.
Investment risk – Your salary sacrifice contributions are invested, and like any investment, they come with inherent risks. Depending on market performance, your super balance can fluctuate.
Access to funds – Remember that once your money is in your super fund, you generally can’t access it until retirement or you meet certain conditions. Ensure you have enough liquid assets outside of super, such as cash or shares, to cover emergencies or short-term financial needs. Super is designed for retirement savings, so accessing your money before you reach preservation age can be challenging. Preservation age varies from 55 to 60, depending on when you were born. If you were born on or after 1 July 1964 your preservation age will be 60. From 1 July 2024, the preservation age will be 60.
Seeking advice – It’s a good idea to consult with a financial adviser or accountant before implementing a salary sacrifice strategy. They can help you assess your unique financial situation and provide personalised recommendations.

Is it worth salary sacrificing into super?

The answer depends on your individual financial circumstances and goals. Do you have outstanding debts or immediate financial needs that should take priority over extra super contributions? It’s crucial to have a solid financial foundation before diverting funds into super.

For many Australians, especially those who can afford to do so, salary sacrificing into super can be a highly effective way to boost retirement savings, enjoy tax benefits, and secure long-term financial stability.

Higher income earners tend to benefit more from salary sacrificing due to the potential for substantial tax savings but the benefits are not exclusive to that income bracket.

It is sensible to strike a balance that suits your overall financial plan and to stay informed about any changes in legislation or contribution caps. As your financial circumstances are unique to you, consider seeking professional advice to help you make the best decision for your future.

Source: MLC

Millions to get more Age Pension starting from 20 March 2024

By Robert Wright /May 28,2024/

Government Age Pension payments increased on 20 March, so if you’re one of the millions of eligible Australians, you’ll have a little more to spend.

The increases are designed to help address inflation and cost of living increases. Here’s what happened.

Age Pension payments increase in March 2024 due to indexation

Here are the maximum Age Pension payment rates that came into effect from 20 March, which are paid fortnightly, along with their respective annual equivalents. Single payments rose by $19.60 per fortnight, while combined payments for couples increased by $29.40.

Maximum Age Pension payments from 20 March 2024

	Fortnightly*	Annually*
Single	$1,116.30	$29,023.80
Previous payment	$1,096.70	$28,514.20
Couple (each)	$841.40	$21,876.40
Previous payment	$826.70	$21,494.20
Couple (combined)	$1,682.80	$43,752.80
Previous payment	$1,653.40	$42,988.40

*Includes basic rate plus maximum pension and energy supplements

The payment rate increased 1.8%, indexed to inflation. Payments last increased in September 2023 and are likely to change again when they are next assessed this coming September.

Tip: Depending on how much super you have, you may be eligible to receive Age Pension payments in addition to income from your super savings.

Income and assets test thresholds increase for the Age Pension

The government reviews the Age Pension income and assets test thresholds in July each year. The upper thresholds also increase in March and September each year in line with Age Pension payment increases.

Whether you are eligible for the Age Pension depends on your age, residency and your income and assets.

If your income and assets are below certain limits (also known as thresholds), you may be eligible.

When determining how much you’re entitled to receive under the income and assets tests, the test that results in the lower amount of Age Pension applies.

Here are the income and assets test thresholds that apply as at 20 March, compared with previous thresholds.

Assets test thresholds comparison

The lower assets test threshold determines the point where the full Age Pension starts to reduce, while the upper assets test thresholds determine what the cutoff points are for the part Age Pension.

If the value of your assets falls between the lower and upper assets test thresholds, your entitlement will reduce.

The higher your assessable assets, the lower the amount of Age Pension you are eligible to receive.

Your family home is exempt from the assets test but, your investments, household contents and motor vehicles may be included.

Asset test thresholds from 20 March 2024

	Full Age Pension limit	Part Age Pension cutoff
Single – Homeowner	$301,750 (unchanged)	$674,000
Previous threshold	$301,750	$667,500
Single – Non-homeowner	$543,750 (unchanged)	$916,000
Previous threshold	$543,750	$909,500
Couple (combined) – Homeowner	$451,500 (unchanged)	$1,012,500
Previous threshold	$451,500	$1,003,000
Couple (combined) – Non-homeowner	$693,500 (unchanged)	$1,254,500
Previous threshold	$693,500	$1,245,000

Income test thresholds comparison

The lower income test threshold determines the point where the full Age Pension starts to reduce, while the upper income test threshold determines what the cutoff point is for the part Age Pension.

Income includes things like payment for employment or self-employment activities, rental income, and a deemed rate of income from financial investments such as managed funds, super (if you are over the Age Pension age) or account-based pensions commenced after 1 January 2015.

Income doesn’t include things like emergency relief payments.

Income test thresholds from 20 March 2024

	Full Age Pension limit	Part Age Pension cutoff
Single	$204 per fortnight (unchanged)	$2,436.60 per fortnight
Previous threshold	$204 per fortnight	$2,397.40 per fortnight
Couple (combined)	$360 per fortnight (unchanged)	$3,725.60 per fortnight
Previous threshold	$360 per fortnight	$3,666.80 per fortnight

If you have income between the lower and upper income test thresholds, your entitlement will reduce as your level of income rises.

For example, the Age Pension payment for a single person earning more than $204 per fortnight will reduce by 50 cents for each dollar earned over $204.

For a couple earning more than $360 per fortnight combined, the Age Pension payment for each person will reduce by 25 cents for each dollar earned over $360.

Tip: The Work Bonus may allow you to receive more income from working, without reducing your Age Pension.

The maximum Work Bonus balance that you can accrue is $11,800.

Source: Colonial First State

Super fund performance and unlisted assets

By Robert Wright /December 01,2023/

Differences in the returns of various super funds have primarily been driven by whether the funds are invested in unlisted or listed assets.  

Super fund returns are always in the spotlight around the end of the financial year. This is when funds publish their annual performance results and send statements to members, and when researchers publish tables comparing fund returns. 

Going forward, fund members may notice a wider than usual gap between the performances of various super funds. 

A large part of the difference in returns this year comes down to whether – and how much – super funds have invested in unlisted assets. 

In recent years, super funds have been under pressure due to their practices around “lumpy” revaluations for unlisted assets concerning the quality, accuracy and frequency of revaluing unlisted assets.

Millions of super members are in the dark about these practices – and therefore about how much their investment is really worth.

In July 2022, the Australian Prudential Regulation Authority (APRA) released final revisions on Prudential Standard SPS 530, Investment Governance to ensure better member outcomes through updated requirements that increase stress-testing, valuation and liquidity management practices.

The enhancements to strengthening investment governance have been in effect from January this year. 

What are unlisted assets?

Unlisted assets are investments that are not traded through a public exchange or market, such as the Australian Securities Exchange (ASX) or the New York Stock Exchange (NYSE). 

Investors in unlisted assets can either directly own the asset or invest with others through an unlisted trust. 

The most common types of unlisted assets are: 

Unlisted property – from small property syndicates with assets such as neighbourhood shopping centres to multi-billion-dollar unlisted property trusts which own major CBD office buildings, large shopping centres or hotels. 
Unlisted infrastructure – development or ownership of roads, rail, ports, airports and utilities. 
Private equity – invest in or own private companies, including early stage investments in technology companies. 
Private credit – involves lending to privately owned businesses.

What are listed assets?

Listed assets are those that are traded on a stock exchange or share market, such as the ASX or NYSE.

The most common type of listed asset is shares, also known as equities.  

Other listed assets include:

Listed property – offers the ability to invest in a diverse portfolio of large properties through an Australian real estate investment trust or real estate investment trust on an international share market. 
Listed infrastructure trusts – trusts that invest in major infrastructure e.g. roads, rail and airports. 
Bonds – issued by a company or government to raise money which constitute a loan from an investor. 
Exchange traded funds (ETFs) – collection of assets that track the performance of a major investment index e.g. the S&P 500 Index. 
Managed funds – money from a number of investors which is pooled to buy investments.

How are unlisted and listed assets valued? 

The difference in how unlisted and listed assets are valued is what affects super fund returns at any given time. 

Timing of valuation

Unlisted assets are typically valued at set intervals. For example, quarterly or annually. 
Listed assets are valued every day. Investors decide daily how much they are willing to pay for shares in the company or trust.

Method of valuation

Valuations of unlisted assets are often made using historical or point-in-time factors. For example, unlisted property valuations are partly based on past sales of similar properties, which may have been completed when market conditions were different. As a result, values for unlisted assets are often different for the same asset in a listed market. 
Listed assets are valued by investors in an organised, open and transparent market. Valuations are an accurate, up to the minute reflection of what willing buyers and sellers in a market will pay.

Continued criticism is that valuations arranged by asset owners could lead to biased results if asset owners judge the value of their own investments too generously.  

How does valuation timing impact your super’s performance? 

The difference in valuation timing means changes in economic, competitive and market conditions are reflected in the value of listed assets more rapidly than unlisted assets. Therefore, listed asset values are affected more in the short term by market ups and downs versus unlisted assets. 

Over the past months, central banks globally have sharply increased their interest rates in response to inflation. Rises in global and Australian interest rates have been quickly factored into prices for assets listed on stock exchanges. The result was an immediate fall in prices and losses for investors.

However, these significant changes may not yet be reflected in the valuations of unlisted assets. 

Add to this the fluctuations in unlisted infrastructure and unlisted property funds, which many super funds are directly invested in, and the valuation of unlisted assets becomes a bigger issue. 

Essentially, the difference in performance lowers returns in super funds, especially those holding mainly listed property, while funds holding mainly unlisted property have not yet been affected.

However, as unlisted property trusts go through their valuation cycles, downward returns are expected to be reported in those trusts, due to the significant devaluation risks in the higher interest rate environment. 

Why is liquidity in super funds important? 

Super is a long term investment and while you are accumulating your retirement savings, you may not need regular access to your money. However, super funds do need the flexibility to buy and sell investments to manage risk, respond to market conditions and take advantage of opportunities that arise.  

Super funds also need to maintain liquidity to meet the redemptions of retiring investors, so the liquidity of investments is crucial at a fund level.  

Source: Colonial First State 