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Super versus mortgage

By Damian Gibson

Financial Adviser, Elevate Wealth Solutions

 

IT is the Aussie age-old debate: to direct surplus cash to your mortgage or to superannuation?

Both are good long-term financial strategies which can help put you in good stead for a comfortable retirement.

But which is more financially effective and why?

We generally see people rushing to pay down their mortgage and then find they hurry to shovel money into super later in life.

Albeit, reducing debt is great and makes sense given interest rates are at all-time lows.

However, depending on your circumstance, you may be doing yourself out of a dollar if you are neglecting your super.

 

The following will discuss the two main differences between both strategies, which are:

Marginal tax rates versus superannuation tax rates;

Super returns versus savings on interest.

 

First difference:

While we can’t avoid paying tax, it sure can be reduced.

Let’s look at the difference between marginal tax rates and superannuation tax rates.

Marginal tax rates vary from zero per cent to 45 per cent (excluding Medicare), while concessional contributions to super such as your employer’s superannuation guarantee charge (SGC) and salary sacrificing are generally taxed at a rate of 15 per cent.

Investment earnings inside super also attract 15 per cent tax.

While contributions and earnings inside super are taxed, savings on your mortgage interest does not attract any tax.

 

Second difference:

Despite tax on investment earnings inside super, the returns will generally (on average) provide a better outcome compared to the amount saved in interest.

In today’s economic environment, mortgage interest rates are around 3.5 per cent to 4.5 per cent and the return of a typical balanced fund has historically been between six per cent to 7.5 per cent per annum.

For instance, Kate’s wage is $100,000 per annum and she salary sacrifices $15,500 into her super.

By contributing this amount to super, she will be saving approximately $3,410 on tax.

 

 

 

How?

If Kate received her $15,500 income instead of contributing it to super, she would be taxed at her marginal tax rate (MTR) of 37 per cent (plus Medicare).

However, as Kate salary sacrificed this amount, she pays tax at the super contribution rate of 15 per cent.

Every single year Kate does this she is $3,140 better off.

Let’s look at an example considering both differences.

Kate is still earning $100,000 and receives SGC of $9,500.

Therefore, she has $15,500 remaining in her annual $25,000 concessional contributions cap.

For argument’s sake, Kate has surplus cash of $15,500 and is not sure whether to direct it to her super or mortgage.

If Kate contributed this amount to her mortgage, she would be reducing her debt by $9,455 ($15,500 less than 37 per cent MTR).

Assuming a 3.5 per cent simple interest rate per annum, the $9,450 would be saving Kate around $331 per year in interest.

Conversely, if Kate contributed this amount to her super as a concessional contribution, she would be contributing $13,175 to her super ($15,500 less than 15 per cent contributions tax).

Assuming a 6.5 per cent return per annum and 15 per cent tax on earnings, the $13,175 would be earning Kate around $728 per year.

Contributing to super instead of your mortgage is generally more financially beneficial for people who earn between $50,000 to $160,000.

If your income is less than $50,000 per annum, it might be difficult to find surplus cash to contribute.

Further, if your income is between $18,201 and $37,000, your MTR is 19 per cent (plus Medicare).

Therefore, making additional concessional contributions to super will only be saving you four per cent on your MTR.

Conversely, if your income is around $185,000 per annum, your $25,000 concession contribution cap will start to fill up.

As your employer will be contributing at least $17,575 to your super, this only leaves $7,425 remaining in your cap.

This article is general in nature and does not consider your personal circumstances.

Prior to redirecting any surplus cash, it is important you speak with a financial adviser to identify which avenue is most appropriate for you.

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About the Author: Eastern Shore Sun

The Eastern Shore Sun is your monthly community newspaper, reaching over 30,000 homes and businesses in the communities of Clarence and Sorell. It is the product of Nicolas Turner, Justine Brazil, Ben Hope, Simon Andrews, Tobias Hinds and guest contributors, with support from advertisers.

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