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Is it better to put your money into super or a mortgage?

Is it better to put your money into super or a mortgage?

Preparing for your future requires a diligent approach to budgeting and saving. But it's not always as straightforward as tossing money into a savings account each week — you need to think about the best savings strategy for your needs.

It's a good idea to spread your investments, from a short-term savings account to a long-term superannuation fund. If you take out a home loan to purchase a property, you'll grow your equity over time. Some Aussies even invest in shares.

It's a good idea to have a diversified savings strategy, but sometimes you might be wondering about what to do here and now. You might have a few thousand dollars in your transaction or savings account that you think could have better earning potential elsewhere. But just where do you put it?

The mortgage vs superannuation debate

For many homeowners, it's desirable to knock down their mortgage balances. In such a case, some extra cash could go towards this. In other instances, the relief of lowering your home loan is outweighed by the desire to contribute a little extra to your superannuation fund.

You'll need to get a grip around home loan and superannuation rules to establish which options are applicable in your circumstances. There are some other factors to consider, as well.

Should you put money towards your home loan?

Home equity is the value of an asset, minus any money that's owed on it. If your home is worth $500,000 and you've got a loan balance of $200,000, your equity is $300,000. So the more money you contribute to your home loan, the more equity you have. In this sense, paying off your loan might seem like a sensible option, as you're actually building up your interest in an appreciable asset.

You can also use your home equity to take out a line of credit, enabling you to complete home renovations and increase the value of your home. This could lead to successful results if you choose to sell your property in future months or years.

The case for superannuation

Of course, there are plenty of reasons why you might instead turn to your superannuation fund when it comes to contributing cash.

For starters, this might be your only option: Many home loan products have restrictions on making extra repayments, particularly fixed-rate mortgages. Check whether you can make additional payments before throwing down the cash.

You can make extra contributions before and after tax. If you do a salary sacrifice, you'll only pay 15 percent tax on your contribution. The higher your income, the more tax you'll pay — certainly well over this rate. Accordingly, there's a significant tax benefit to making additional payments into your super fund, really making the most of your money.

One of the most precious commodities you have is time. If you're able to put more money into your superannuation account now, on top of your employer contributions, it could grow to ensure you're covered for the future.

ASIC's Money Smart website has a handy Super vs Mortgage calculator that will help you crunch the numbers. 

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Learn more about superannuation

What are personal contributions?

A personal contribution is when you make an extra payment into your superannuation account. The difference between personal contributions and salary sacrifices is that the former comes out of your after-tax income, while the latter comes out of your pre-tax income.

How do you claim superannuation?

There are three different ways you can claim your superannuation:

  • Lump sum
  • Account-based pension
  • Part lump sum and part account-based pension

Two rules apply if you choose to receive an account-based pension, or income stream:

  • You must receive payments at least once per year
  • You must withdraw a minimum amount per year
    • Age 55-64 = 4%
    • Age 65-74 = 5%
    • Age 75-79 = 6%
    • Age 80-84 = 7%
    • Age 85-89 = 9%
    • Age 90-94 = 11%
    • Age 95+ = 14%

If you want to work out how long your account-based pension might last, click here to access ASIC’s account-based pension calculator.

Is superannuation paid on unused annual leave?

If your employment is terminated, superannuation will not be paid on unused annual leave.

How much extra superannuation can I add to my fund?

There is an annual limit of $25,000 for concessional contributions – that is, money paid by your employer and extra money you pay into your account through salary sacrificing. There is also a limit on non-concessional contributions. Australians aged between 65 and 74 have a limit of $100,000 per year. Australians aged under 65 have a limit of $300,000 every three years.

Who can open a superannuation account?

Superannuation accounts can be opened by Australians, permanent residents and temporary residents. You’re automatically entitled to superannuation if:

  • You’re over 18 and earn more than $450 before tax in a calendar month
  • You’re under 18, you work more than 30 hours per week and you earn more than $450 before tax in a calendar month

What are the age pension's age rules?

Australians must be aged at least 65 years and 6 months to access the age pension. This eligibility age is scheduled to increase according to the following schedule:

Date Eligibility age
1 July 2019 66 years
1 July 2021 66 years and 6 months
1 July 2023 67 years

Can my employer use money from my superannuation account?

No, your employer can’t touch the money that is paid into your superannuation account.

What fees do superannuation funds charge?

Superannuation funds can charge a range of fees, including:

  • Activity-based fees – for specific, irregular services, such as splitting an account after a divorce
  • Administration fees – to cover the cost of managing your account
  • Advice fees – for personal investment advice
  • Buy/sell spread fees – when you make contributions, switches and withdrawals
  • Exit fees – when you close your account
  • Investment fees – to cover the cost of managing your investments
  • Switching fees – when you choose a new investment option within the same fund

What are reportable employer superannuation contributions?

Reportable employer superannuation contributions are special contributions that an employer makes on top of the regular compulsory contributions. One example would be contributions made as part of a salary sacrifice arrangement.

How much is superannuation?

Superannuation is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How does the age pension work?

Most Australians who are of retirement age can qualify for the age pension. However, depending on the size of your assets and post-retirement income, you might be entitled to only a reduced pension. In some instances, you might not be entitled to any pension payments.

What happens if my employer falls behind on my superannuation payments?

The Australian Taxation Office will investigate if your employer falls behind on your superannuation payments or doesn’t pay at all. You can report your employer with this online tool.

How do you access superannuation?

Accessing your superannuation is a simple administrative procedure – you just ask your fund to pay it. You can access your superannuation in three different ways:

  • Lump sum
  • Account-based pension
  • Part lump sum and part account-based pension

However, please note that your superannuation fund will only be able to make a payout if you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

The preservation age has six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

There are also seven special circumstances under which you can claim your superannuation:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

Can I carry on a business in an SMSF?

SMSFs are allowed to carry on a business under two conditions.

First, this must be permitted under the trust deed.

Second, the sole purpose of the business must be to earn retirement benefits.