I'm 70 and retired. Despite enforced monthly withdrawals, my Super pension account balance has been steadily rising. Should I use any future monthly increase to grow my account balance or should I withdraw the gain and place the funds in my mortgage offset account? Alternatively, would I be better off using the gain to pay down my 680K mortgage?
John, near Berry, NSW
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Thanks for your question. I can only provide you with general information however I’d recommend a formal review of your financial position which would consider several factors such as longevity of your retirement funds, cashflow and estate planning taxes.
I have assumed that you have no other financial assets than your Super Pension Account which provides you with more cashflow than you require, and you are making standard home mortgage repayments.
I can see 2 significant areas which would be of consideration for you:
- Net wealth improvement with the debt versus without.
- Possible improvement in Centrelink Age Pension.
1.Net wealth improvement with the debt versus without.
This is a simple comparison of what rate of return are you receiving on the Super Pension Account versus the interest incurred on your home mortgage.
For example, if you have $100,000 in a Super Pension Account providing you with a return of 5.00% p.a. or $5,000 p.a. after fees whereas your home mortgage interest rate is 4.00% p.a., then you are obtaining an additional 1.00% p.a. or $1,000 p.a. by retaining your Super Pension Account of $100,000 instead of withdrawing this amount to reduce your home mortgage.
Please note that repaying your home mortgage would give you a guaranteed return of 4.00% p.a. in this example whereas you may not achieve a 5.00% p.a. return on your Super Pension Account each year. To achieve a return above 4.00% p.a. in your Super Pension Account would require you to be invested in some assets that have a possibility of giving you a negative return.
2. Possible improvement in Centrelink Age Pension.
Centrelink do not assess the value of your own home (nor give you a credit for any mortgage against your home) for the purposes of the Asset and Income Test. Therefore, if you were not receiving the maximum Centrelink Age Pension yet, you may improve your entitlements if you were to redeem part of the Super Pension Account to repay part or all of your home mortgage as your Centrelink assessable Assets would be reduced.
Typically, I Advise my clients that debt reduction / elimination is the best course of action as the return is the lending rate you pay, it is Tax effective and reducing debt carries no investment risk. Then the main point is the funds you were using to pay out the loan can be used in other ways such as increased spending or investing in income producing assets – no one has ever got poor from paying out debt!
I strongly recommend you consult a Financial Adviser to receive personal advice before you take any action as you are ineligible to make contributions back into Superannuation if you withdraw funds from your Super Pension Account and change your mind.
Every client’s situation is different and Personalised Financial Advice should always be taken to ensure you are in the best possible financial position that you can be.
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