Golden rule of paying off the mortgage is under challenge for retirees
Paying down the mortgage first has been a mantra among advisers and well-meaning in-laws for generations. But putting money into super might be a smarter choice now for some.
Pay down your mortgage first has been a mantra among advisers — not to mention well-meaning in-laws — for generations. But, times change and these days for one group in particular there may be better ways to use hard-earned savings.
We are talking about the millions of Australians who are in the run-up to retirement, especially those looking at three to five years before they reach the point where they no longer want to work every day.
For this group, they may be much better off putting money into super. On face value, paying off the mortgage should always make more sense.
But, this logic ignores the special tax status of super. Especially the ability to make tax-protected contributions to super before you retire. After all, the mortgage can be paid off at any time.
Even though mortgage rates are now much higher than they were before the RBA began its hiking cycle, the tax advantages of super will still shine through.
Financial adviser Bruce Brammall says if you have $10,000 to spare and you have the choice of putting it into either the mortgage or into super — think again if your retirement is not far off.
As Brammall explains, “if you put the $10,000 into super versus putting it into the mortgage, the money put into your super fund gives you an instant return”.
It works like this: if you put the money into your mortgage it will most likely be post-tax. The average salary earner is paying 34.5 per cent tax, though you may have paid as much as 47 per cent tax on your annual income.
In contrast, if you put it into super, it can be a pre-tax (or concessional) contribution where you will only pay 15 per cent tax on the amount that gets invested.
According to Brammall: “Let’s say you are 60 and you want to retire at 64 — you have three years to go — you put that $10,000 into the mortgage and you get to keep $6550.
“Alternatively, you put it into super and the number is $8500 — there’s a $2000 advantage … you do that three years in a row you are better off by $6000.”
Speaking on The Australian’s Money Puzzle podcast, Brammall says: “It’s a better return compared to what you will get having it in a mortgage offset account — in fact the tax saving is massive”.
Advisers such as Brammall say the bang for your buck from tax-protected super contributions are at their best close to retirement.
It is a very different story if the saver was in their early 30s with many years to go on the mortgage. In this case, the numbers are different because the mortgage will be bigger and tax- free retirement is decades away.
Super contribution limits and the mandatory amount you must put into super every year are both about to change again this year.
The pre-tax contribution allowance, or cap, is currently set at $27,500 per annum. From July 1 this year the figure moves up to $30,000 due to inflation indexation.
The caps include any amount put into super from the superannuation guarantee charge, which is rising from 11 to 11.5 per cent on July 1.
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