When it comes to planning for your financial well being, my rule of thumb is to do what you can as early as you can. However the question is, do you get rid of debt or do you take advantage of super’s tax-efficient savings environment?
What you do (or don’t do) now will impact later on your financial well being or retirement. In this article, I explore what might be better: early additional super contributions or early extra repayments on your home loan.
It is generally accepted that the optimum financial state in retirement is to own your own home and have a healthy superannuation balance. Traditionally, people strive to pay down their home loan early, usually by making extra repayments. When the home loan is paid off, they set their sights on contributing extra to super.
However, now that the superannuation contribution caps have reduced, this approach needs rethinking.
As it is now more difficult to contribute large sums of money to your super, the smaller amounts allowed under the new contribution cap rules may need more time to build to a balance that accommodates the retirement you wish to achieve.
For many people, that may mean making super contributions at the same time as paying home loan repayments.
Redeploying additional cash bound for your home loan to super may mean that you could need to utilise the full term of your loan rather than paying it off early. However, it may also mean that the money you invest in your super account will have longer to benefit from compounding interest and grow into a healthy nest egg for you. Care needs to be taken, however, as once funds are in super access is restricted1 and what if your circumstances change?
Using your cash as effectively as possible to suit your objectives and concerns is the key.
For example, home loan repayments are usually made using after-tax money, whereas super contributions can be made using before-tax money via a salary sacrifice arrangement (and so long as the total of such contributions is under the allowed concessional contribution cap amount). There may be tax deduction advantages around making personal contributions if you have been unable to use your concessional contribution limit through employer or salary sacrifice contributions.
Put simply, superannuation tax concessions can enable you to use your surplus cash flow more effectively.
MLC2 recently compared, for the same (pre-tax) amount, making a concessional super contribution with making a mortgage repayment.
This table indicates the net benefit of $1,000 if (a) contributed to super (and taxed on entry to the super fund at the concessional tax rate of 15%3) and (b) used as a home loan repayment taxed before it is applied to the loan (at standard marginal tax rates (MTR) of 34.5%, 39% and 47%).
As you can see, contributing to super results in a greater after-tax amount being available. That is if you contribute $1,000 to super you have $850 available, compared with $655 if you contribute to the home loan, assuming a marginal tax rate of 34.5%.
MLC also modelled the longer-term outcomes of investing in super and paying down a home loan over 15 years.
A number of assumptions have been made, and these outcomes are illustrative only. However, the 15-year scenario makes a compelling case for considering extra contributions to super rather than additional repayments to your home loan.
Investment returns and home loan interest rates vary from person to person. In addition, you will have personal objectives which need to be considered, which is why you need advice specific to your individual circumstances and a strategy that enables you to meet your home loan obligations and fund your long-term financial objectives.
Your home loan repayment strategy and your super accumulation strategies need to be considered together rather than in isolation. What’s more, given the reduced amount you can contribute to super each year, these strategies need to be considered earlier rather than later.
For families, professionals, executives and business owners, seeking advice and implementing an appropriate superannuation or salary sacrifice strategy early in your career can make a huge difference to your super balance when you retire. Please contact our team on (07) 3007 2007 or email bcribb@stratusfinancialgroup.com.au, snicholas@stratusfinancialgroup.com.au or jmarshall@stratusfinancialgroup.com.au
1 https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/getting-your-super
2 MLC Technical News – Latest changes and insights 14 August 2017
3 This does not consider ‘High-Income Earners’ or Division 293 Tax, which is an additional 15%.
At Stratus Financial Group, we help families, professionals, executives, business owners and retirees manage their complex financial affairs and coordinate their professional advisers.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.
Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.