What’s the best option? Home Loan Vs Super

“You could have saved around $500,000”,

I’ve sat across the table from many clients who come to me because they are looking to access some money later in life, for many reasons like helping them clear the home loan or helping the next generation get their first home. 

I’ve had to break it to them that what they did 10 or 20 years ago has some massive consequences today.

Why?

When it comes to investing, the conversation often revolves around the classic debate of property versus shares.

Some swear by property, while others champion the stock market.

However, this debate often overlooks an important question: not just what to invest in, but how to invest tax effectively?

For those aiming to build a portfolio or boasting a substantial income, understanding the tax implications of your investment strategy can significantly influence your after-tax returns.  

This is where superannuation can shine, I've witnessed firsthand how a decently structured average investment inside super can outshine a great investment that's been set up outside super, particularly for those in the highest tax bracket. 

Many view their super as just another investment, checking annual statements to see if their balance has gone up or down. But here's where many miss the mark. Superannuation isn't an investment; it's a tax structure, and a particularly generous one at that.

Let’s say you're earning over $180,000 annually with some spare cash at your disposal.

If you receive this extra income directly, you're looking at a tax rate of 49% on every dollar above $180,000, leaving you with just 51 cents on the dollar.

However, redirecting an additional $1,000 into your super not only lowers your taxable income but also means you pay just 15% tax on that money instead of 49% (provided your income is under $250,000).

In other words, you save 34% on earn dollar earned.

The benefits don't stop there. Over the years, your investment's earnings are taxed at the same concessional rate, so the savings compound year after year. And if you wait until retirement to sell the assets, moving your funds into a tax-free pension account, you could sidestep capital gains tax entirely.

Capital gains tax can be a hefty burden, especially for those selling off property or shares later in life. Proper structuring advice could save you hundreds of thousands in taxes, making a significant difference in your financial future.

Superannuation has been around since the '90s, and while it's understandable that some may have overlooked its benefits initially, it's been a key part of our financial landscape for over 30 years. For serious investors not leveraging super, it might be time to take a closer look. While accessing super funds before retirement poses challenges, strategic planning and advice can turn superannuation into a cornerstone of your financial freedom, retirement planning, or building a legacy.

What about if I have a home loan?

Here is where it gets personal.

If you need flexibility in your life, then superannuation may not be the best structure for all savings.

Getting ahead on your home loan provides flexibility for if things change in your life, as super is locked away until you reach your retirement years.

Repaying the home loan represents a safe risk-free return in the form of interest saved.

An example.

If you reduce your home loan by $1,000 and your home loan has an interest rate of 6.5%, this saves you $65 in interest per year.

Simple and easy to understand, it’s a risk free 6.5% return.

What would it look like if you put this same amount in super?

Well it’s much more complex to understand. 

Let’s assume do this via your employer, pre tax this amount is grossed to $1,960.

You then pay tax on the concessional tax rate of 15%, this reduces this gross amount to net $1,666.

You then get an investment return from your super, there is a wider range of possible returns here depending on what your super is invested in, but let’s take the Australian Super balanced super option 10 year average 8.6%, it gives a pre-tax return of $143.

This return is then taxed concessionally at 15% to get an after-tax return of $121, or a 12.1% return.

 So fundamentally when most people look at the return of their super and their home loan rate, they might compare a 7%, 8% or 9% return on super and say, well that’s not much more than my home loan why would I lock my money away.

Well it’s like comparing apples to oranges.

As my example shows, the actual after-tax return depends on your tax rate. A 12.1% return sounds a lot better than a 6.5% return to me.

It’s important to note that it gets extra personal here.

Because the return on your super largely depends on your financial plan, risk tolerance and risk profile. A good financial adviser can help you get this balance right for you. For example, the Australian Super high growth option has a 10 year return of 9.62% return, but it had a much rocker road with the portfolio going up and down more than the more the balanced option, if you moved out of the high growth option when it fell your actually return might be significantly worse than the average return of this investment option.

Want to know more?

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The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.