We just inherited $200,000. Should we pay off the mortgage, invest, or both?

We’ve inherited $200,000 and owe $500,000 on our $2 million home. Our combined income is $260,000 (excluding super), with three kids heading to $10,000/yr high schools. We plan to spend $50,000 on a holiday. Should we invest the rest in ETFs (exchange-traded funds) or LICs (listed investment companies) for compounding and passive income, pay down the mortgage, or a mix of both? The money is currently in our offset account.

The key to successful financial planning is clarity on your goals. To answer your question, I would need to understand the goals that you have, and the prioritisation of those goals.

Having a plan for your inheritance, rather than spending it irresponsibly, is essential.Credit: Simon Letch

As you have identified, there are many potential things you could do with this inheritance, and a good argument could be made for each of them. In addition to the options you’ve mentioned, there’s also boosting your super or pre-paying the kids school fees which often attracts a discount.

The only way for you to determine what’s right for you is to be clear on what it is you’re working towards. Is it a retirement goal? A goal to be debt free? A goal to be able to help the kids down the road? Or to cover the kid’s school fees?

You’ve identified here that a holiday is a top priority and allocated to that, so that’s a great start. I’d encourage you now to sit down together and talk about what other goals you have. I think once you’ve nailed that down, the answer to your question will become clear.

I’m 62, work full-time on $200,000 and receive an invalid pension of around $100,000. My current super balance is $583,000. Last year I had to pay additional tax on concessional contributions (division 293) of $3,948. Given this extra 15 per cent tax, does it still make sense to salary sacrifice up to the maximum contribution limit?

The standard tax rate that is applied to super contributions is 15 per cent. Division 293 tax is an additional tax of 15 per cent that applies to part or all of a member’s concessional (tax-deductible) contributions where their income exceeds $250,000. You therefore end up paying a total of 30 per cent (15 per cent + 15 per cent) on contributions where division 293 applies.

Your annual income is $300,000, and therefore the tax that applies to the portion of your earnings over $190,000 is 45 per cent plus Medicare.

This being the case, 30 per cent tax applied to money sent to super remains attractive compared to the alternative of 45 per cent were you to instead take this remuneration as cash.

Your circumstance is a little unusual in that most people who trigger division 293, will have maxed out their concessional contribution caps due to standard employer superannuation guarantee contributions. In your case, I’d imagine no superannuation is payable from your pension, so you would have some headroom, thus permitting some salary sacrifice.

There is still a tax saving to be had by you salary sacrificing and using up your maximum concessional superannuation contribution limit. I wouldn’t let the application of division 293 dissuade you from continuing on this path, if it makes sense as part of your broader financial planning strategy.

I hope to retire in a couple of years and have realised that I need to get clear on what I spend, and what I will be spending, to determine whether I’ve got enough super. Any tips on how to calculate this?

You are spot on with this realisation. Go to the government’s Money Smart website and look for the budget planner. It’s a great tool for this purpose.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: [e-mail]

• 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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