The case for voluntary payments

As highlighted last week, defined benefit super fund members can get substantial benefits from making voluntary super contributions. The situation is different for other super fund members, such as those in the private sector and federal public servants employed after July 1, 2005, and for new military employees after July 1, 2016, when entry to the MSBS will be closed off. Their employer super funds are accumulation-based.

The final benefit is a lump sum, its size varying with the level of employer and member contributions and fund earning rates after taxes and expenses during the period of fund membership.

There's no certainty about the ultimate return and to complicate matters further, the money's tied up untouchable until retirement, most likely at age 60 or later.

Given the risk of redundancy or need to change jobs, except for people close to or above retirement age, diverting money into super can lead to financial problems before retirement. This risk shouldn't be forgotten when deciding whether to make member contributions, even if they can be made on a salary sacrifice basis.

Salary sacrifice contributions reduce personal income tax, but all the tax savings as well as the contributions are tied up in the super fund until retirement.

There are no personal income tax advantages from using take-home pay to reduce the family mortgage, but the money is still available if needed later on. The quicker the mortgage is paid off, the less the financial pressure will be in the event of redundancy or sudden reduction in family income.

Further, there's no certainty that diverting additional money to super will generate higher returns than those from paying off a mortgage. Indeed, marriage breakdown and unemployment can result in the forced sale of the family home, even though there may be adequate funds in super to cover the mortgage.

A very high super fund return could compensate for this risk but in volatile times, it's unlikely.

A strategy for accumulation fund members is to rely solely on compulsory employer contributions until the house mortgage is paid off, or greatly reduced. Then, especially for people near retirement, the tax advantages of salary sacrifice super may make voluntary super contributions attractive.

The closer retirement age is, the more attractive super contributions are, but even then a key factor is the potential investment returns.

Speculation about adverse changes to the super tax rules don't help in making contribution decisions. But when the family home is finally owned outright, even if the tax rules do change, additional super contributions are likely to continue to compare favourably with other investment options.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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