Dollars & Sense: Can I use super to pay off my mortgage when I retire?

Our financial adviser considers if it is wise to use super to pay down a mortgage when you retire, as a reader asks about giving children money to buy a home.

The Dollars & Sense wealth column looks at using super to pay off a mortgage. Artwork: Emilia Tortella

Welcome to our Dollars & Sense column. While in no way is it formal financial advice, it is a way to stress test your decision-making, to find out potential financial implications before you make your choice, and to discover more about structuring your affairs so that your money works harder for you. Submit your questions to [e-mail].

---

I am about to turn 55, married with two teenage children. We are about to renovate our house and still have a mortgage. When I retire in the next 10 years, I should have around $1m in super and about $500,000 left to pay on the mortgage. Can I use my super to pay off the mortgage on retirement and is it wise to?

Paul, Canberra

To access your superannuation you need to meet a condition of release, of which the main ones are: reach preservation age (generally age 60) and retire, or reach age 65 even if you haven’t retired.

Based on meeting a condition of release you can access income and lump sum amounts from your superannuation and you can use those for what you choose. So yes, you could take money out of super to pay down your mortgage.

Whether it is wise to do this or not would depend on your overall circumstances, but generally two of the key considerations would be:

1. What is going to be the most tax effective way to retain your wealth? The superannuation environment is very tax effective (especially once in retirement/pension phase) so removing money from here is not preferred if you had other funds outside of superannuation.

2. What will likely get you the best return? Paying down your mortgage is a tax-free and risk-free return of whatever your mortgage interest rate is, for example 5 per cent. Keeping money invested in superannuation will come with some risk, such as the ups and downs of investment values, and the returns are unknown unless you hold it all in cash and term deposit-style holdings.

Over history, a balanced portfolio of superannuation investments would generally return a greater amount than the cost of your mortgage interest rate in the current environment, but this would change if interest rates increase.

The final consideration is whether you have any other option to pay down your mortgage. If you are retired and have no other income, but need to either gradually or in a lump sum pay off your mortgage, superannuation may be your only option.

If you had access to other funds, it could be worth considering using those first in order to retain the tax-effective superannuation account.

Should I give my children money to buy a home?

I have substantial assets and plan to retire in two years. My wife and I want to travel and enjoy our retirement. However, our eldest son is engaged and wants to start a family but he and his wife are finding it very difficult to buy a property in Sydney. I want to give them $100,000. How should I structure this and how do I allow for a similar amount for my youngest son so that it’s fair?

David, Sydney

Hi David, it is very kind of your support your kids in this way. Due to high property prices in Australia, this is becoming a more common occurrence.

While they are your kids, unfortunately things can happen with money, family, estates and issues arising. So it is best to still always put things in writing via formal agreements. A lawyer who has experience in this could assist you.

I would also suggest for simplicity and equality that you make the loans the same amount to each child.

You may also consider whether this gift needs to be noted in your relevant estate planning documentation as well as consider how the loans are treated in regard to your sons, versus their partners, in particular in the event of a potential future relationship breakdown.

For example does the loan ever need to be paid back and does that answer differ for your children versus their partners. A gift of cash, versus you going guarantor on a loan for your kids, will be less risky and complicated for you so is likely a better option.

Josh Pennell is a director at Prosper Advisory Financial Services and author of the book What Parents Want. Follow him @thefamilyfinanceguy

The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all relevant circumstances. Before relying on any of the information, please ensure that you consider the appropriateness of the information provided with regard to your objectives, financial situation and needs, and seek independent professional advice.