Superannuation and home loans: a new dilemma for future retirees

Senior Australians are retiring with bigger superannuation balances and larger home loans, creating confusion about the best place to put their money.

A new analysis by investment giant Colonial First State has found many people are missing out on the chance to retire debt-free, despite it being a top priority for most pre-retirees.

The CFS research found that 28 per cent of 50-to-64 year olds have a mortgage, while 14 per cent of retirees have home loans. However, only 15 per cent plan to use their super to pay down their mortgage, it found.

The analysis suggests that while everyone’s situation is different, in many cases it appears best to use super to pay off the home loan – especially people who want certainty, simplicity and are eligible for age pension payments.

CFS head of technical services Craig Day said more people would face this dilemma as debt in retirement planning became a “new reality” for many amid higher home values, ageing home buyers and longer loan terms.

More pre-retirees are using superannuation strategies to save tax. Picture: iStock

“If you look at it from a purely financial perspective, it’s just a trade-off between what you think the fund is going to return at, and what the mortgage rate is,” he said.

But for people seeking peace of mind and not wanting to worry about future investment returns, switching super to debt could “make a lot of sense”.

“The age pension is a critical consideration for someone who has reached age 67. That will be what sways a lot of people in deciding to take some of their super and pay off the mortgage.”

CFS calculated that a retiree with $600,000 in super and an outstanding home loan of $400,000 could boost their age pension income by $15,600 annually by swapping $200,000 from super to the mortgage.

Homeowner couples with less than $1.045m of assets and singles with less than $695,500 can receive some pension, and Catapult Wealth director Tony Catt said understanding this was vital in retirement planning.

“If a loan is against your home it is not assessed in assets test calculations,” he said. “You could have a $200,000 home loan and $1 million in super but they don’t take the $200,000 off your net assets”.

Mr Catt said the super versus mortgage debate was “a very valid discussion, and the numbers can be quite startling”.

He said an increasingly popular strategy was for people in their 50s and early 60s to maximise their tax-deductible super contributions – currently capped at $30,000 annually – then repay their mortgage at retirement.

“You can save tens of thousands of dollars in tax,” Mr Catt said.

Another strategy is to repay most of the mortgage with super but have the home loan available during retirement, through a redraw facility, to cover emergencies.

“Once you stop working, you are not going to get that loan back again,” Mr Catt said.

He said he was seeing more people head towards retirement with home loans.

“People are borrowing more, the cost of living means they haven’t been able to pay back as much, and some are helping their kids more with education costs and various things.

“Having kids later has been the other big factor.”

More people were choosing to work for longer, but in part-time work, Mr Catt said.

“They are saying ‘we just want to do different work’, maybe $20,000 or $30,000 a year,” he said.

“You can earn nearly $25,000 a year tax-free – for a couple that’s $50,000 free of tax.”

Mr Day also said delaying the date retirement was an increasingly popular option for Australians, while downsizing their home to free up cash was not so popular – largely because of the high costs.

This article first appeared in The Australian.