Weighing up tipping more into your super or paying down the mortgage can be a difficult decision.

Weighing up tipping more into your super or paying down the mortgage can be a difficult decision.Credit:Kerrie Leishman

I hate super because it is essentially the government telling me what to do with my hard-earned money. And,for decades,super accounts have been left relatively unguarded by governments,fleeced for fees by funds and eaten up by unnecessary insurance premiums and multiple accounts.

I confess it’s only recently,as I approach my 40th birthday,that the money sitting in my super has begun to feel “real” in any sense. I know I can’t be alone in this.

But I also love super – because it’s the government looking out for me – and you. It knows that we,just like every other human being,have trouble with delayed gratification. If we didn’t,we could all be trusted to deploy the economic principle of “consumption smoothing”,meaning that throughout our working lives,we’d diligently set aside enough money to cover our expenses when we are old and unable to work.

Turns out,most people don’t do this – or,at least,don’t do enough of it. Hence superannuation.

But precisely because super is an enforced financial product – a deprivation of our liberty,essentially – previous governments have seen fit to grant generous tax concessions on the money locked away,to sweeten the deal a little.

A lot,actually.

Super tax breaks have been estimated to bleed the federal budget by a sum now approaching the equivalent of the aged pension,with the biggest benefits accruing to higher-income earners.

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That’s because contributions to and earnings from super accounts are,for the most part,taxed at a low flat rate of 15 cents in the dollar.

And I want it.

Of course,I’m already in – we all are – because of the compulsory super guarantee,which stipulates that 9.5 per cent of our before-tax salary is put into super and taxed at just 15 per cent.

But you can score plenty more of this tax-minimisation action,if you want it.

Workers are allowed each year to tip in an extra $25,000 of their untaxed money into super – and only pay tax at the 15 per cent rate.

This cap includes the value of your employer’s 9.5 per cent contributions. But that still leaves many workers with significant space to make extra contributions.

But wait,there’s more.

From the 2018-19 tax year,the government has allowed unused portions of these annual concessional caps to be rolled over,for up to five years,for those with super balances under $500,000.

You can log into your MyGov account and find an estimate of your unused cap amounts under the Australian Taxation Office section.

As tax hacks go,it’s one of the very best in town.

(A small note for those earning more than $250,000 a year,you only get access to a super contribution rate of 30 cents,not 15 cents. But hey,that’s still a discount on your 47 cent marginal tax rate,including the Medicare Levy.)

All this looks even sweeter when you remember any earnings on super investments are also taxed at the low 15 per cent rate. This in itself is such an attractive benefit that the government also allows people with super balances under $1.6 million to make up to $100,000 a year in contributions to their super from theirafter-tax salary.

Why would you want to tip in money to superafter you’ve already been taxed at your higher income tax rate? Well,precisely to take advantage of this lower tax rate on investment earnings. Lower,because if you instead invested that money directly in shares or other funds,you’d eventually have to pay tax on half of any capital gains enjoyed,applied at your full marginal tax rate.

Now,there are several things to consider before you throw money into super,particularly for young people.

Money you put into super is,of course,effectively locked up until you’re aged 60. If you want to access those savings before then,such as for a home deposit,it’s a no go. You can,however,investigate the government’s First Home Saver Scheme,which after Tuesday’s federal budget,will allow you to tip $50,000 in extra contributions into the low-tax super environment,which can be withdrawn after a period for a home deposit. Worth checking out.

For those who have a home and mortgage,it is important to consider if you want to plough money into super or pay down your home loan faster. Reasonable people can differ in their opinions on such matters.

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For me,with home loan interest rates so low,I’ve decided to pay my mortgage off at the minimum for the time being,and use a portion of my monthly savings to max out my super concessional caps. I’m still planning to do my little dabble in direct share ownership,but it will sit alongside this super savings strategy.

It’s certainly something worth considering when deciding how best to invest your money.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about financial products. They should seek their own professional advice before making financial decisions.

You can follow Jess’ money adventures on Instagram@moneywithjess and subscribe to her weekly email Money with Jess viaThe Agehere andThe Sydney Morning Heraldhere.

correction

An earlier version of this article stated that only people with superannuation balances under $500,000 could access the $25,000 a year concessional superannuation contributions cap. This is incorrect. The $500,000 balance limit applies to rollover of unused cap amounts from previous years.

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