Tag Archives: Superannuation Contributions

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.

1. 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.

2. 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.

3. 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

Mortgage vs super: where should I put my extra money?

By Robert Wright /February 16,2024/

It’s a dilemma many of us face – are we better off directing extra money to our mortgage or super? As with most financial decisions, it’s not a one size fits all approach and here are some factors to consider in deciding what’s right for you.

Key takeaways:

• There may be tax advantages when you contribute to super, especially if you salary sacrifice or you’re eligible to claim a tax deduction for personal super contributions.
• The power of compounding returns could mean that even small contributions to your super over many years could make the world of difference.
• By making extra mortgage repayments, coupled with any potential increase in the value of your property, you will build equity in your property at a faster rate than if you were to make just the minimum repayments.

Building the case for super over mortgage

You might think your super is already being taken care of – after all, that’s what your employer’s compulsory Superannuation Guarantee contributions are all about. But these contributions alone often aren’t enough to ensure you achieve the retirement lifestyle you want to live.

Making extra contributions to your super is a great way to boost your retirement savings. As an investment vehicle, super is a very tax effective way to save for the future.

The power of compounding returns

Super is a long term investment, at least until you retire, and potentially much longer if you leave your money in super and draw a pension after you retire.

This long investment term, coupled with the rate of tax on your super investment (generally 15%), means your money can add up and generate further investment returns on those returns. This is known as compound returns, or compounding.

The expenses of daily life can be considerable. Thinking about directing money to super might not seem like a priority when we feel overwhelmed by the effort to save a deposit for a home, paying down debt, and the costs of raising a family.

However, the benefit of compounding returns means that even small, frequent contributions can make a big difference down the track. It’s about striking a balance that is right for you today and remember, nothing has to be forever. As your life changes, you can simply adjust your contributions strategy to suit your needs.

Building super early

To maximise your retirement savings while allowing compounding returns to do the heavy lifting, the best approach is to start early. The longer compounding continues, the bigger your savings could be. Entering retirement debt free is an attractive prospect. It can be easy to think that you need to repay your debt before you can start thinking about saving for retirement. However, it doesn’t have to be one or the other.

You can see the difference small, regular contributions could make to your final retirement income using the MoneySmart retirement planner calculator.

Tax benefits of super

From a tax point of view, super can be incredibly beneficial. Salary sacrificing some of your before-tax salary or making a voluntary after-tax contribution for which you can claim a tax deduction, can be effective ways to not only grow your retirement savings but also reduce your taxable income.

One great benefit of investing in super is that concessional (before tax) contributions are taxed at a maximum rate of 15%. This can be higher though if you earn over $250,000.

Mortgage repayments are usually made from your take home pay after you’ve paid tax at your marginal tax rate. Your marginal tax rate could be as high as 47%. So, depending on your circumstances, making a voluntary deductible contribution to super or salary sacrificing may result in an overall tax saving of up to 32%.

There is a limit on the amount you can contribute into super every year. These are referred to as contribution caps. Currently, the annual concessional contributions cap is $27,500. If you’re eligible to use the catch-up concessional contributions rules, you may be able to carry forward any unused concessional contributions for up to 5 years. If you exceed these caps, you may be liable to pay more tax.

Tax on super investment earnings

The initial tax savings are only part of the story. The tax on earnings within the super environment are also low.

The earnings generated by your super investments are taxed at a maximum rate of 15%, and eligible capital gains may be taxed as low as 10%. Once you retire and commence an income stream with your super savings, the investment earnings are exempt from tax, including capital gains.

Also, when it comes time to access your super in retirement, if you’re aged 60 or over, amounts that you access as a lump sum are generally tax free.

However, it’s important to remember that once contributions are made to your super, they become ‘preserved’. Generally, this means you can’t access these funds as a lump sum until you retire and reach your preservation age, between 55 and 60 depending on when you were born.

Before you start adding extra into your super, it’s a good idea to think about your broader financial goals and how much you can afford to put away because with limited exceptions, you generally won’t be able to access the money in super until you retire.

In contrast, many mortgages can be set up to allow you to redraw the extra payments you’ve made or access the amounts from an offset account.

Building the case for reducing your mortgage over super

For many people, paying off debt is the priority. Paying extra off your home loan now will reduce your monthly interest and help you pay off your loan sooner. If your home loan has a redraw or offset facility, you can still access the money if things get tight later.

Depending on your home loan’s size and term, interest paid over the term of the loan can be considerable – for example, interest on a $500,000 loan over a 25-year term, at a rate of 6% works out to be over $460,000. Paying off your mortgage early also frees up that future money for other uses.

Before you start making additional payments to your mortgage, it’s suggested that you should first consider what other non-deductible debt you may have, such as credit cards and personal loans. Generally, these products have higher interest rates attached to them so there is greater benefit in reducing this debt rather than your low interest rate mortgage.

Conclusion: mortgage or super

It’s one of those debates that rarely seems to have a clear-cut winner – should I pay off the mortgage or contribute extra to my super?

The answer, probably somewhat annoyingly, is that it depends on your personal circumstances.

There is no one size fits all solution when it comes to the best way to prepare for retirement. On the one hand, contributing more to your super may increase your final retirement income. On the other, making extra mortgage repayments can help you clear your debt sooner, increase your equity position and put you on the path to financial freedom.

When weighing up the pros and cons of each option, there are a few key points to keep in mind.

One of the key questions to consider is what is the likely balance you’ll need in your super? Work backwards starting with working through what retirement looks like for you, the type of lifestyle you’d like, and how much you need to live on each year.

From there, you can start to consider your sources of income in retirement. This is likely to include super but could also include a full or part Age Pension, or income from an investment property or other sources.

You can then start thinking about your current balance, contributions strategies and whether you’re on track to have enough saved to supplement your other retirement income sources.

The MoneySmart retirement planner calculator can help you to estimate how much super you may have in retirement and how long your super may last. You also need to think about how you plan to spend your money in retirement.

In most cases, there isn’t one set strategy that you should follow and it can quickly change as you grow older, start a family and reach retirement age. You should also consider whether you’ll need to access any additional funds you put aside before you reach retirement. If it’s in your super, it’s locked away. If it’s in your mortgage, there are generally options to redraw.

Home ownership and comfortable retirement are financial goals that many strive towards. If you reach a point where there’s some surplus cash flow to consider where to put your extra money, it’s a good dilemma to have.

Life is complex, so it pays to speak with a financial adviser before you make any big financial decisions when it comes to your super or mortgage.

 

Source: MLC

Your super checklist for EOFY

By Robert Wright /June 03,2022/

The lead up to 30 June can be a good time to maximise tax benefits that may be available to you inside super.

Certain contributions, which we cover below, may have the ability to reduce your taxable income, or see you pay less on investment earnings.

Contributions that could create tax benefits:

• Tax-deductible super contributions

You may be able to claim a tax deduction on after-tax super contributions you’ve made, or make, before 30 June this year.

To claim a tax deduction on these contributions, you’ll need to tell your super fund by filling out a ‘notice of intent’ form. You’ll generally need to lodge this notice and have the lodgement acknowledged by your fund, before you file a tax return for the year you made the contributions.

Putting money into super and claiming it as a tax deduction may be of particular benefit if you receive some extra income that you’d otherwise pay tax on at your personal income tax rate (as this is often higher).

Similarly, if you’ve sold an asset that you have to pay capital gains tax on, you may decide to contribute some or all of that money into super, so you can claim it as a tax deduction. This could reduce or at least offset the capital gains tax that’s owing.

• Government co-contributions

If you’re a low to middle-income earner and have made (or decide to make before 1 July 2022) an after-tax contribution to your super account, which you don’t claim a tax deduction for, you might be eligible for a government co contribution of up to $500.

If your total income is equal to or less than $41,112 in the 2021/22 financial year and you make after-tax contributions of $1,000 to your super fund, you’ll receive the maximum co-contribution of $500.

If your total income is between $41,112 and $56,112 in the 2021/22 financial year, your maximum entitlement will reduce progressively as your income rises.

If your income is equal to or greater than the higher income threshold $56,112 in the 2021/22 financial year, you won’t receive any co-contribution.

Also, you’ll generally need to have at least 10% of your assessable income coming from employment/business sources to qualify.

• Spouse contributions

If you’re earning more than your partner and would like to top up their retirement savings, or vice versa, you may want to think about making spouse contributions.

If eligible, you can generally make a contribution to your spouse’s super and claim an 18% tax offset on up to $3,000 through your tax return.

To be eligible for the maximum tax offset, which works out to be $540, you need to contribute a minimum of $3,000 and your partner’s annual income needs to be $37,000 or less.

If their income exceeds $37,000, you’re still eligible for a partial offset. However, once their income reaches $40,000, you’ll no longer be eligible for the offset, but can still make contributions on their behalf.

• Salary sacrifice contributions

Salary sacrifice is where you choose to have some of your before-tax income paid into your super by your employer on top of what they might pay you under the superannuation guarantee.

Salary sacrifice contributions (like tax-deductible contributions) are a type of concessional contribution and these are usually taxed at 15% (or 30% if your total income exceeds $250,000), which for most, means you’ll generally pay less tax on your super contributions than you do on your income.

If you’re in a financial position to set up a salary sacrifice arrangement, you may want to do this before the start of the new financial year, so talk to your employer or payroll division to have the arrangement documented.

Important things to consider

Contributions need to be received by your super fund on time (ie, before 30 June) if you’re planning on claiming a tax deduction or obtaining other government concessions on certain contributions when you do your tax return.

There are limits on how much you can contribute. If you exceed super contribution caps, additional tax and penalties may apply. Read more about super contribution types, limits and benefits.

Currently, if you’re aged 67 to 75 and wanting to make voluntary contributions, a work test applies unless you meet an exemption. Changes to the work test are coming more on this below.

The government sets general rules around when you can access your super, which typically won’t be until you reach your preservation age and meet a condition of release, such as retirement.

Source: AMP