Age and benefits of sacrifice

Most mortgages offer redraw facilities.

Last week's "Asset check" column on salary packaging drew a question about the benefits of salary sacrificing superannuation compared with paying off a home mortgage. The answer, as always with financial matters, depends on individual circumstances and preferences.

In the case of superannuation, age is especially important because, since 1999, all new super contributions must be preserved untouchable until the minimum preservation, which is now 60 for all taxpayers born after July 1, 1965. Thus, even a 48-year-old today cannot access any salary-sacrifice super contributions for at least another 12 years and a 35-year-old has to wait another 25 years at least before being able to touch any superannuation.

More worrying for these and even older taxpayers is the possibility as has already been suggested of further increasing this preservation age to 62 or even 67, the latest starting age for the pension.

The case for paying off a home mortgage is overwhelming in this context. There are no restrictions  on gaining access to savings applied to reducing the home mortgage. Most mortgages offer redraw facilities and flexible access to funds or the alternative option of increasing the outstanding loan if there is sufficient collateral.

Why then has salary sacrifice super been such an attractive savings option? The answer is simply the immediate tax savings because the super contributions are taxed at only 15 per cent compared with personal tax rates on most wage earners of more than 30 per cent and as high as 48.5 per cent.

In the past also, the limits on how much taxpayers could contribute to super were more generous and offered an attractive alternative to negatively gearing investments. Today, with no restrictions on how much can be gained from negative gearing strategies, salary sacrifice super has fallen out of favour except for older age groups.

In terms of investment returns, paying off a house mortgage is by far the highest-yielding safe investment available. This is only for owner-occupied houses where interest expenses are not tax deductible.

With house mortgage rates now between 5 per cent and 6 per cent a year, this is the after-tax return from reducing a house mortgage.

Because of the 15 per cent tax on fund earnings, the pre-tax earnings of a super fund would have to exceed 7 per cent a year to provide a better return.

As has been the case over recent years, super fund returns can be volatile and uncertain, which increases the attractions of paying off a mortgage. So except for the older age groups where the preservation rules are not an issue or for younger people with surplus money and the mortgage already paid off, salary sacrifice super is a much less attractive saving option than it has been.

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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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