As someone approaching retirement, or even recently retired, you may still have some outstanding debt in the form of a home mortgage, investment loan or personal loan. Don’t worry, you’re not alone. Many Australians will have some form of residual debt at retirement.
You might still be many years away from retirement and want to access your super early to pay debt. We’ll be covering that too.
So, should you be using your superannuation to pay debt?
Withdrawing Super to Pay Debt
Using your super to pay debt can reduce the stress on your personal cash flow or even put you in a completely debt free position. But it will also reduce your superannuation balance, leaving you with less investments to fund you throughout retirement.
In my opinion, there are three areas of consideration when determining whether you should be using your superannuation to pay debt:
1. Super earnings vs loan interest
From purely a mathematical perspective, comparing the expected earnings you will receive within super to the interest you would otherwise save by paying down debt is a good starting point.
For example, in its simplest form, if your super investments are expected to earn, say, 6% per year, but the interest on your loan is only 4%, then one could argue that leaving the money in super is a better option than withdrawing it to pay debt.
However, there are other considerations. For instance, if your super is in accumulation phase, earnings tax of 15% is payable, meaning a 6% return is actually only 5.1% after tax – still higher than the 4% loan amount. But remember, investment earnings are never guaranteed; whereas paying down debt is guaranteed to reduce your loan balance and therefore guaranteed to save you interest.
2. Cashflow affordability
If you are finding it difficult to cover your loan repayments, withdrawing money from your super to pay down some debt can reduce the repayment amounts and alleviate some financial stress. So, even if leaving money inside super provides a better financial outcome, withdrawing some of your super to pay down debt may be the better option to reduce the pressure to meet loan repayments each month.
If you are over Age Pension age, your superannuation, whether in accumulation or pension phase, is assessed under the income and assets tests in calculating your potential entitlement to Centrelink benefits.
If you are under Age Pension phase, but your superannuation is an income stream providing you with pension payments, or you have an annuity income stream, the pension is assessed for Centrelink purposes under the income and assets tests.
Therefore, if you were to withdraw your super to pay debt, such as a home loan, you can reduce the amount of income and assets assessed for Centrelink purposes, because your family home is exempt from Centrelink assessment. This may result in higher Centrelink benefits.
Related Article: How Much Super Should I Have to Retire?
Can I Use My Super to Pay Debt?
Yes, you are able to use your super to pay debt provided you have reached your superannuation preservation age.
If you have reached your preservation age and are still working, you can access your super by starting a transition to retirement pension. This gives you access to up to 10% of your account balance each financial year. Transition to retirement pension income is tax free if you are over age 60. If you are under age 60, tax may be payable on the pension income.
If you have reached your preservation age and met the definition of retirement for superannuation purposes, or are aged 65 or over, you will have full access to your super. There is no limitation on how much of your super you can withdraw to pay debt.
Keep Reading: How to Access My Super
This video can help you determine whether it’s better to salary sacrifice or pay down debt:
Early Release from Super
If you have not yet met your superannuation preservation age, you may be able to access your super under one of the early release of super conditions.
In fact, access on compassionate grounds allows you to access your super to make a home mortgage repayment or payment of council rates that needs to be made to avoid losing your home.
Other types of early release conditions include:
- Access due to severe financial hardship
- Access due to a terminal medical condition
- Access due to temporary incapacity
- Access due to permanent incapacity
Ultimately, if you would like to withdraw super to pay debt because you are struggling to make ends meet, then you need to either have reached your superannuation preservation age, or have satisfied one of early release conditions.
If you are comfortably making ends meet, but would like to know whether or not you should be withdrawing super to pay debt, you might consider comparing the interest rate on your loan against the rate of earnings you can expect within super, together with your preference of carrying debt versus retaining investments.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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