STEVE GREATREX
E
veryone should try to make
additional payments into their
superannuation. This can seem
challenging if you’re a family
with bills and a mortgage to pay.
However, the federal government now limits
your extra payments (both non-concessional
and concessional) into super so you cannot
ea si ly “catch up” once you r home loa n is pa id off.
Therefore, you are better off taking advantage
of the concessional payments you can make
every year and let your home loan run a little
longer (though in many cases you can do both).
There are two contributions you can make
if you are an employee: salary sacrificing and
(for lower income earners) a non-concessional
payment that generates the federal govern-
ment’s co-contribution.
Let us take the example of John and Maria.
John earns $37,000 and Maria earns $80,000 a
year. They have a mortgage of $400,000 with
an interest rate of 4% and a term of 30 years.
They pay off their loan fortnightly (meaning
they make a few extra repayments a year)
with $881 instalments.
DOES IT PAY TO SALARY SACRIFICE?
If John salary sacrifices $18,799 ($723 per
fortnight) into super and reduces his taxable
income, he can save more than $1100 and grow
his super balance (see table). Additionally, if
John puts $812 into super as a non-concessional
(after-tax) payment and then does a tax return,
he w i l l be el ig ible for a $ 4 06 co -cont r ibution.
For Maria, she decides to salary sacrifice
$17,004 ($654 per fortnight) into super. When
evaluating the difference between her marginal
tax rate of 32.5% (plus the Medicare levy of
2%) and the super tax rate of 15%, Maria can
effectively save more than $3300.
WHAT IF THEY PUT THE MONEY INTO THE
MORTGAGE INSTEAD?
O ver 30 yea rs, i f t he sta nda rd mor tgage repay-
ments are made (not including fees), the total
repaid will be more than $687,000 – including
interest of more than $287,000 – according
to ASIC’s Moneysmart mortgage calculator.
However, if John and Maria did not salary
sacrifice into super and decided those same
dollar amounts were to be put towards the
mortgage (after tax), they would have about
an additional $26,000 or $1000 per fortnight
to put towards their loan. It would effectively
pay off the loan in less than 10 years for a total
of about $485,000 and with less than $85,000
in interest payments.
However, considering this model does not take
into account annual household expenditure, it’s
likely to need a more realistic middle ground.
MOVING THE GOALPOSTS
Let’s say Maria had a surplus income of $8000,
or $5400 after tax ($208 per fortnight). If themortgage repayments were to increase from
$881 to $1089 per fortnight, the loan would be
repaid in 20 years and 10 months.
In other words, Maria and John would
knock more than nine years off their home
loan. Total repayments would be more than
$589,000 (including interest of more than
$189,000), saving the couple about $100,000
from the original 30-year loan term.
Yet if Maria’s surplus income of $8000
was instead salary sacrificed to super for 21
years, rather than going towards paying the
mortgage earlier, it could enhance her super
balance by more than $315,000.
Based on the super guarantee alone (and
its increase to 12% in 2024), Maria’s balance
would grow to more than $350,000 over 21
years (assuming returns of 7%pa after fees).
This means her super balance could well be
in excess of $665,000.
Put simply, if used to accelerate mortgage
repayments, $5400 net over 21 years would
result in savings of about $100,000. Where-
as if $8000 gross was salary sacrificed to
super, it would result in more than $315,000
being saved. However, this would have to
be reduced by the amount of the mortgage
still outstanding at the end of year 21, which
is around $175,000.
If my logic is correct, salary sacrificing
to super as opposed to making additional
mortgage payments certainly seems to be
the winner. The reasons for the difference
are the higher net investment being made to
super on a regular monthly basis as opposed
to after-tax mortgage repayments, and the
higher earnings being achieved inside the
superannuation environment. MSteve Greatrex has worked in financial
services for 30 years and founded financial
planning firm Wealth on Track in Adelaide
in 2009.BOOST YOUR RETIREMENT SAVINGS
Thanks to the tax advantages, coupled with the
potential for higher investment returns, extra
contributions can enhance your future lifestyle.
COVER STORY PAY OFF YOUR MORTGAGE OR INVEST
SUPER
Salary sacrifice into
super: how you can save
John Maria
Income $37,000 $80,000
Salary sacrifice into
super (taxed at 15%)$18,799
(-$2820)$17,004
(-$2551)Tax rate outside super
plus Medicare levy19% +2%
$18,799
(-$3948)32.5% +2%
$17,004
(-$5866)
Non-concessional
super contribution
(after tax)$812 + $406
(government
co-contribution)Tax savings $2346 $3315
Source: Wealth on Track