How to use superannuation to pay the mortgage

The ABS says that only 56 per cent of people aged 55-64 are mortgage-free, and there are fears that more and more Australians will find their retirement plans seriously challenged as they try to survive on a reduced income, with mortgage payments to boot.

It's a potentially serious situation, but it can be solved by taking action sooner rather than later. The starting point is figuring out where you are now.

Think about Mal, aged 55, who earns $120,000 a year and has a mortgage of $200,000. Mal hasn't been all that been interested in finances, so his home loan's interest rate is still 5 per cent and the repayments are drifting along at $1300 a month. Until now, retirement has always seemed light years away, and he hasn't given any thought to what would happen when that day finally comes along.

Hopefully, finding out where he is could get Mal motivated. So his first step should be to go to my website (www.noelwhittaker.com.au) and start using the loan calculators. Mal would quickly find out that his loan has 20 years to go, and that he will arrive at age 65 with a debt of $127,535 remaining. That should be an urgent call to action; luckily he does have a guardian angel - superannuation.

The trick is to take advantage of the different tax rates between money received in the pay packet, and money salary-sacrificed to super. Mal loses 39 per cent of gross pay taken in hand, but just 15 per cent on contributions to super. Furthermore, money paid off the mortgage is effectively earning 5 per cent, while most good superannuation funds are returning around 8 per cent to 10 per cent per annum.

Mal's employer contribution should be $11,400 a year, which leaves room for an additional $14,600 to be contributed to superannuation in one way or another. This can be done either by salary sacrifice, which requires the employer's co-operation, or by making additional personal superannuation contributions.

To keep the example simple, let's suppose Mal makes personal superannuation contributions of $1217 a month ($14,600 a year), which should boost his superannuation by $12,410 a year after the 15 per cent contributions tax is taken off. The payments will be tax-deductible, which should lead to a tax refund of $5700 a year.

If the additional superannuation contributions put too much strain on his budget, he could use that tax refund to help get by, but a better option would be to contribute it to superannuation as non-concessional contributions. There is no entry tax on such contributions.

In 10 years, when Mal is 65 and ready to retire, the non-concessional contributions should have boosted his superannuation by $87,000, and the deductible concessional contributions by $189,000.

It's a magnificent outcome. Instead of facing a debt of around $127,000 when he retires, which could take a big chunk of his employer superannuation, he has boosted his personal superannuation by $276,000. He could then withdraw $127,000 tax-free to pay off the debt, and still have an extra $149,000 in super, in addition to the employer superannuation.

There is a lesson here for anybody facing retirement within the next 20 years. The actions you take today will make a huge difference to the kind of retirement you are likely to enjoy. The longer you leave it to start - the harder it will be.

Question: You have often written that the way to avoid the 17% death tax on the taxable component of your superannuation that goes to non-dependent children is to withdraw your superannuation funds prior to death and pass the funds into your personal name. My assets in superannuation are nearly all in property, partially in pension mode and partially in accumulation mode. When is the date of this transfer taken into effect? Is it at the time of instruction to the superannuation fund or when the transfer of land is completed.

Answer: This question raises a number of important issues and highlights the challenges that may arrive when a self-managed super fund invests in a non-liquid asset like property. The inquiries I have made indicate that if a notice to the trustee is given prior to the death of the member and the redemption of the asset is made within a reasonable time of the death of that member there should not be problem. A case in point may be when a self-managed fund invests in managed funds which may have a 30-day redemption period. However, it's a bit more complex when the asset consists of real estate which could take months or even years to sell.

I think a better option is to anticipate the problem in advance and take all steps necessary to ensure that a non-liquid asset is not held in the fund at the time of a member's death. I appreciate that death can happen suddenly, but that is a rare occurrence - in most cases there is a degree of warning.

Also, keep in mind that the sole purpose of having money in superannuation when you are retired is to enjoy the concessionally taxed status of the fund. If the member had a reasonable belief that their life expectancy was no more than three to five years, they would have little to lose by transferring the money back to their own name sooner rather than later. Remember, the tax-free threshold is $18,200 and most portfolios do not generate this kind of income.

Question: In recent column you mentioned that pensioners could earn up to $300 a fortnight from personal exertion. What is a definition of "personal exertion".

Answer: It means income from paid employment and has recently been extended to include income from self-employment. It has been $300 a fortnight per person from July 1.