Ask the Expert: Salary sacrificing alternatives for under 40s

Question 1

I’m 33 and have $150,000 in super. I am salary-sacrificing $600 a fortnight to try to grow my balance further.

At what point is it more prudent to reduce salary sacrifice amounts and, say, try to pay down my mortgage faster?

Generally, putting pre-tax dollars into super (via salary sacrifice) provides a better return for most people than paying down a mortgage.

However, given your age, you must consider that you won’t be able to access these funds until age 60 at the earliest. I also think it’s likely that this will be moved up by a few years at some point in the next 30 years.

I also note you already have a strong super balance for someone your age. Therefore, it may be prudent to reduce salary sacrifice contributions and look at:

• Paying down mortgage and any other debts. Having debt well and truly under control provides peace of mind and a buffer should you lose your job or have a negative financial shock. It also leaves you in a strong position should you wish to borrow more at a future point.
• Save and invest outside super. While this may not be as tax effective, it does allow you to access funds at short notice. It also allows you to possibly retire early and provides some protection against legislative risk should superannuation rules be changed in the future.
• You may also wish to look at other plans or goals you have in the future and start saving for them.

It’s great you have been saving and investing in super. Your future self will be thankful.

However, just like you should diversify your investments, you should also diversify the structure and time periods you hold investments.

Some continued salary sacrifice may still be appropriate but due to the long time frame and uncertainties that come with life, ensure your short and medium-term finances are in order.

Question 2

Hi Craig, I am 65 with $370,000 in super, from which I draw a flexi-pension.

I still have a $70,000 mortgage. I intend to decide whether to pay out my mortgage about six months before I reach pension age. My decision will depend on my mortgage interest rate, fund earnings, and likely reduction in pension.

Are there any implications to drawing out a large amount near pension age, from Centrelink’s perspective?

Paying out your mortgage would make sense from an age pension perspective. This is because your super would be counted under the asset test, whereas having a loan against your principal home is not deducted from the asset test.

In your situation, taking out $70,000 from super and paying out your loan would mean Centrelink would count only $300,000 in super under your assets test rather than $370,000.

The above assumes the loan is against your principal place of residence.

If you had an investment property and the loan was secured against that property, then the loan amount would reduce the level of Centrelink assessable assets.

Question 3

Hi Craig, I love your column, which I have read for a few years and learned many things from your articles. I hope you can help my friend.

Her son worked in Australia for five years then moved to overseas for five years. He will come back in few years’ time.

Can he put some money in super to keep his account active and not be eaten by fees?

Hello,

Yes, the superannuation contribution rules don’t differentiate between Australian residents and non-residents.

He can make after tax non-concessional contributions. If he wanted to make personal tax-deductible contributions, things are more complicated, and he would need advice.

If he plans on retiring in Australia, then building up his super could be a good move.

In relation to fees, what he should concentrate on is investing in a good fund where investment returns are in excess of any fees. He should also review whether he has any insurance within his super fund and whether he should retain it.

Insurance premiums can be pricey and if he is overseas some of his cover may become invalid. He should check this with his super fund. There’s no point paying premiums if he then couldn’t successfully claim.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.