Pay off the mortgage or save for retirement – it’s a common dilemma for many households and I usually suggest doing a bit of both, as seeing the mortgage going down tends to give you a more immediate sense of financial wellbeing, while knowing you are also boosting your retirement savings helps take away some of the fear of the future.
The salary sacrifice contributions Imelda currently makes into her super are tax effective in that they are only taxed at a flat 15%, whereas if she took the income as salary it would be taxed at 34% (inclusive of the Medicare levy).
By contributing the monies into super Imelda has more of each dollar working for her.
Imelda could consider increasing her salary sacrifice contributions (taking into account the $25,000 annual limit), but a better option could be the transition to retirement strategy, which allows anyone who has reached super preservation age to structure their existing super, super contributions and income in such a way that they save tax. These tax savings can then help to boost your superannuation balance without any impact on household cash flow. How it works is:
• You convert the majority of your existing super balance from accumulation mode to pension mode – this now becomes a tax-free environment and so you no longer pay the 15% earnings tax on the fund earnings (tax saving No. 1).
• You then have to draw a minimum level of income from this super pension account and this income is tax free if you are over 60. For those under 60 all or part of the income may be fully taxable but receives a 15% rebate so is taxed less than salary income would be (tax saving No. 2).
• You then salary sacrifice some of your salary income back into your super accumulation account to offset the pension income you are receiving (tax saving No. 3).
Staying with their public sector and industry funds should also help maximise their super as the fees tend to be lower and most offer cost-effective insurance cover. Being savvy with your finances is often more about little things to stretch your dollars further and make the most of what you have.
Susan Jackson is a financial planner and founder of Women’s Financial Network and author. Her most recent books are Why Saving is Like Dieting and Budgets Don’t Work. www.womensfinancialnetwork.com.au