This is a particularly common and relevant conundrum for individuals and couples close to 60 years of age and/or closing in on retirement. The answer depends on your individual situation and circumstances, but the path taken can have a deep impact on your retirement - either positively or negatively.
Firstly, from a tax perspective, superannuation contributions have a flat rate of tax of 15% when contributing with pre-tax monies, commonly known as salary sacrifice. In comparison, once your individual taxable income reaches $18,200 per annum, you will find yourself in the 21% tax bracket (including Medicare levy). This increases over time as your income moves into higher tax brackets. The higher your marginal tax rate is, the greater the tax saving available to you is.
Let’s compare the two scenarios for an individual with a taxable income of $130,000 per annum.
As you can see, contributing to superannuation with pre-tax monies produces a superior outcome to paying tax personally on that same money.
Secondly, funds invested within superannuation should then be invested appropriately based on your risk tolerance and timeframe to retirement to earn a return on your money. Based on historical returns (which are no guarantee of future performance), a diversified balanced portfolio will very likely produce a superior return to what you are saving in interest on your mortgage – particularly with interest rates at all time lows.
Let’s compare the two scenarios again considering what is going into superannuation or off your mortgage each year through our example above.
As you can see again, contributing to superannuation produces a far greater outcome - a 52% better outcome in just 5 years tan if you had simply focused on paying down your mortgage.
This additional superannuation can possibly be withdrawn at retirement and applied to any outstanding mortgage if relevant.
Superannuation is a tax-effective structure to hold your wealth. However, there are risks associated with contributing into this environment, being that your money is locked away until you reach preservation age (currently age 60), as well as the presence of annual contribution caps (limits on when and how much you can contribute). Because of this, it is vital that such a strategy is developed based on your individual circumstances and goals to ensure it is appropriate for you.
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