How Can I Boost My Super and Pay Less Tax? - MB+M Group
How Can I Boost My Super and Pay Less Tax?
Retirement

How Can I Boost My Super and Pay Less Tax?

A common question often asked by clients who are over the age of 50 and approaching retirements is, “how can I boost my super and pay less tax?” Understandably, people often get anxious as they inch closer to retirement and away from a regular wage. They usually know building up their super is very important, but they may also have a mortgage they are keen to pay off before retirement. 

The answer is crystal clear – superannuation is your friend.  Let’s explain the theory before applying a case study… 

$100 investment – choose whether to salary sacrifice or pay off your mortgage, what do you do?  The answer is simple… Salary sacrifice.

Option 1 – Salary Sacrifice – On the $100 invested, 15% is taxed, with $85 contributed to your superannuation account and earning returns and growth on that amount over time.  

Option 2 – Wage – the amount received is determined by your tax bracket.  If the average tax rate of 32.5% plus 2% Medicare is applied you would lose $34.50 to the tax man, leaving only $65.50 to put against your mortgage.

Considerations

There is a cost to redirecting your money to super, as you won’t pay off your mortgage as quickly and therefore pay a bit more interest. However, the extra compounded earnings in super more than make up for any additional interest expense. 

However, let’s remember the ‘sleep well’ test. Most people want to pay off their home loan as quickly as possible but would consider slowing down repayments if there was a valid reason to, like contributing to super. Some of us, however, are very risk adverse, and hate having an unnecessary debt. This would not be a strategy for them!

“There is a compounding effect – as your super grows, it earns more, leading to further growth”

Greg is 55 years of age, he has a mortgage of $125,000, interest rate of 3.5% and wishes to retire in 10 years or so. Greg’s is currently paying $1800 per onth towards his mortgage, however the minimum repayment is $1,100.

If Greg salary sacrifices and works for one more year, he will be nearly $100,000 better off! Even if he retires after ten years and takes a lump sum from his super to pay off the remainder of his home loan, he will still be about $85,000 in front. 

What you need to consider with this strategy! 

  • The strategy is less attractive if you earn less than $37,000.
  • The tax saving is restricted to how much additional concessional contributions can be made, and potentially any catch-up concessional contributions.

MB+M Committed To Making Your Life Easier……

The MB+M Wealth Creation team can answer your questions and help you to work towards that dream of retiring in a contentment.. Call us on 03 5821 9177 and speaker with an experienced Certified Adviser.

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More Detail Analysis follows:

Superannuation Is You Friend

The numbers suggest, (see below) the answer is crystal clear – superannuation is your friend. 

Let’s explain the theory before applying a case study… if you have $100 and you have a choice whether to salary sacrifice or use it to pay off your mortgage, what do you do?  The answer is simple… Salary sacrifice. If you invest that money into superannuation you will pay 15% tax meaning $85 hits your superannuation account and you get the growth on that amount.   If you decided to receive that money directly, the amount you will receive is determined on how much you are paying in terms of tax.  If we apply the average tax of 32.5% rate plus 2% Medicare you would lose $34.50 to the tax man, meaning you will have $65.50 left to put against your mortgage where you will pay no interest.  This is the reason why the maths always points to contributing to superannuation. There is a compounding effect – as your super grows, it earns more, leading to further growth.

Sure, there is a cost to redirecting your money to super, as you won’t pay off your mortgage as quickly and will pay a bit more interest. However, the long term average rate of earnings on a balanced super fund (say 6.5%) is a lot more than current home loan interest rates (say 3.5%), so the extra earnings in super more than make up for any additional interest expense. 

However, let’s remember the ‘sleep well’ test. Most people want to pay off their home loan as quickly as possible but would consider slowing down repayments if there was a valid reason to, like contributing to super. Some of us, however, are very risk adverse, and hate having an unnecessary debt. This would not be a strategy for them! 

Let’s run the numbers
 Pay MortgageMaximise super
Income$80,000$80,000
Super employer Contributions $7,600$7,600
Salary Sacrifice$8,400
Taxable income $80,000$71,600
Tax & Medicare$18,067$15,169
After tax income $5,161$4,703
Monthly Mortgage Repayments$1,800$1,100
Disposable Income $3,361$3,603
Contributions tax $1,140$2,400
Overall Tax Saving $1,638
Super projection$90,040$189,558
Number of months to pay loan off 78138

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As you can see, if Greg salary sacrifices and works for one more year, he will be nearly $100,000 better off! Even if he retires after ten years and takes a lump sum from his super to pay off the remainder of his home loan, he will still be about $85,000 in front. 

What you need to consider with this strategy! 

  • This strategy works best for individuals who can achieve long term average investment earnings exceeding 6% per annum (based on the current low interest rate environment).
  • The strategy is less attractive if interest rates are rise
  • The strategy is less attractive if you earn less than $37,000.
  • The tax saving is restricted to how much additional concessional contributions can be made, and potentially any catch-up concessional contributions.

MB+M Committed To Making Your Life Easier……

If after reading the above you have questions, or need help, then call MB+M on 03 5821 9177 and talk with one of the experienced Certified Advisors from our Wealth Creation team. We are committed to help you achieve the retirement outcome you desire and making your life easier…..

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Other Reading:
1. Accelerate your Retirement Plans!
2. Retirement planner

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Disclaimer 

This publication has been compiled by OzPlan Financial Services, ABN 35 005 391 202 AFSL 221235 and is current as at time of preparation, April 2020.

This publication has been compiled by OzPlan Financial Services, ABN 35 005 391 202 AFSL 221235 and is current as at time of preparation, April 2020.

Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.

This publication may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified.

To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose.

It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication.

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