Offset to ensure debt-free future

When it comes to planning for retirement, paying off a mortgage should be the cornerstone of security, writes George Cochrane.

When it comes to planning for retirement, paying off a mortgage should be the cornerstone of security, writes George Cochrane.

I AM a 49-year-old single female earning $61,317 a year. I pay a compulsory members contribution of 2 per cent to the Public Servants Superannuation Fund. I have $96,000 in super and another $11,000 in a rollover fund. I have a $232,000 mortgage on a house in the outer suburbs of Melbourne with repayments of $910 a fortnight. My preservation age is 58 and my Centrelink age pension age is 67. I was hoping to retire well before 67 as I am barely capable of working full time now. I realise my super balance is inadequate to enable early retirement. In one year I will attain 10 years service and my employer will match my personal super contributions up to 10 per cent. I receive $911 a fortnight net wages after mortgage, tax and super deductions, so I struggle financially. If I increase my super contributions it will create even more hardship. Should I increase my mortgage repayments instead of increasing the super, or a combination of both? Should I get income-protection insurance and trauma insurance (reducing my net income further), to avoid calamity if I were to get sick? S.M.

Yes, you can't go past the offer to match contributions up to 10 per cent and you need to take this up to the full.

However, you also have to put priority on being able to retire in a mortgage-free home and thus avoid a drain on your retirement income. At least you can then rely on the full-age pension to meet your daily needs.

At your current rate of repayment, it will take you some 17 years to pay off your mortgage, assuming an interest rate of 7.3 per cent. Alternatively, you could pay off a loan of about $155,000 over nine years or $130,000 over seven years.

You need to decide whether you can afford this property or whether you are better off relocating to a smaller unit. Or wait until retirement to sell and then buy what you can then afford without a mortgage, but you'll pay bigger repayments into a bigger mortgage until then. For now, open a mortgage offset and use it as your main deposit account so that, by using a 55-day credit card, you can keep as much money in there for as long as possible. It's the most tax-efficient way to handle your money.

Some people suggest salary sacrificing to the maximum and thus getting a tax deduction, then withdrawing a lump sum at retirement and paying off the mortgage. This may suit those in high tax brackets, depending on whether their super investments make or lose money, but you are already struggling and will be struggling more.

Rollover the benefit from your rollover fund into, say, the AGEST super fund and buy salary continuance insurance through super so as not to reduce the amount you can put into your mortgage offset account. That, plus your sick pay entitlements will, hopefully, insure against any trauma.

Think positive over gearing

I am 27, on a good salary and own an investment unit in Sydney's inner west valued at $580,000 with equity of $220,000. I would like to purchase another unit in the next 12 months and have already saved a deposit of $30,000 to do so. My unit is currently negatively geared but I am not sure whether I should be paying as much as possible off my property and eventually see it positively geared, or should I just leave it negatively geared and continue saving my deposit for my next purchase? With this in mind, should I borrow nearly all the purchase price for the next property or continue to build up a deposit and borrow a lesser amount? J.D.

Put your savings into a mortgage offset account so as to minimise the amount of interest you are paying on your current investment property. Pay the lender only the interest on your current property and add what would be the capital payments to this new account.

Hopefully this will soon convert your negatively geared property into a positively geared property.

Many believe that negative gearing is better because you get a tax deduction. But the Tax Office is not stupid. You are only granted a deduction because you are losing money. All the deduction does is to reduce your loss. Receiving more income from an investment than you are paying out on it is much, much better.

Nor would I rush into buying another investment property. At the end of the day, you want to be able to pay the capital gains tax after a property is sold and end up not only with more than you have paid out in capital and net interest but with more than you would have earned in term deposits in super over the period, to make up for the risks. And that is likely to vary between difficult and impossible for highly leveraged property for some years.

Taxing problem for retirees

I am 56 and retired. I have a deferred super fund with SASS with a total benefit of $188,000. At age 60 I wish to add this to my investment portfolio to increase my monthly income. Is it still the case that I can withdraw this super money tax-free after age 60? F.S.

Yes, under current rules a person born before July 1960 who retires after age 55 can have all their benefits converted to "non-preserved" status, which means they can withdraw the money at will. However, tax is payable between age 55 and 59, with varying rules for lump sum and pension withdrawals, until you reach 60, after which any withdrawal is untaxed.

However, the Greens are focusing on the cost-to-revenue of superannuation's tax benefits and have persuaded, or forced, the government to initiate a review (a "roundtable" in the current jargon) of these benefits, which is due to report in December. If they have their way, you can expect a reduction in tax benefits.

They argue that almost half of those tax breaks go to the wealthiest 12 per cent of Australians. I see this sort of analysis as extremely one-eyed since it needs to be balanced by an estimate of (a) how much will be saved if future governments need to provide less welfare in the form of age pension, aged care and Medicare payments to those who are able to save for their retirement and carry medical insurance and (b) what percentage of income tax is paid by these top income earners. For the latter, the only figures I could find for Australia go back to 2007 when the top 25 per cent of taxpayers paid 66 per cent of net personal income tax and that was before the over 60s ceased to pay tax on super benefits, so the top 25 per cent are probably paying a higher percentage now. This indicates a much less polarised nation than the US where, in 2009, the top 10 per cent of income earners paid 70 per cent of federal income tax.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.

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