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Ask Paul: Can we cash out super to pay down the mortgage?

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Dear Paul,

My husband Alan is a fly in, fly out (FIFO) worker in mining. We have a mortgage of about $459,000. He has about $380,000 in super. I have a casual job and about $100,000 in super.

When Alan turns 60 next April (I'm also 60), can he put all of his super into the house mortgage to get rid of most of that debt and still be working for the same company and doing the same job. Or will he have to leave and get some work elsewhere?

ask paul clitheroe can we pull all our money out of super to pay off the house

We'd also like to know about the tax if we were to take out our entire super at 60. Do we get taxed on that? Do we get taxed if we wait till 67 when we take it out?

We want to slow down and enjoy the fruits of our labour and go travelling. But we're also thinking that while houses are cheap in our town (Geraldton, WA), should we purchase an investment property to have as a further nest egg for later on? - Deb

This is such a sensible question, Deb and Alan, and it should be easy to give you an answer in a few sentences. But the sad reality is that anything to do with super and our tax system is far from simple!

Let's start with what the rules say. When it comes to taking money out of super, we need to satisfy the "conditions of release".

The most common things that let us access our super are that you are:
1. Over the preservation age and retiring.
2. Over the preservation age and starting a transition to retirement income stream.
3. Over 60 and "ceasing an employment arrangement".
4. Aged 65 or over.
5. Dead.

Of these, the last two are pretty easy to understand, with the last condition of release best avoided for as long as possible. While Alan will be 60 next year, it looks like he will continue in the same job with the same employer, so I suspect his only access to super will be starting a transition to retirement income stream.

This is not an issue to be treated lightly and you certainly need to chat to your super fund and seek advice if needed before you do anything. Sure, if Alan has a retirement event once he is over 60 - that is, ceasing an employment arrangement 
- this is likely to be a condition of release.

If he enjoys his work, this is a pretty drastic way to access his super.

Frankly, though, whether or not Alan can satisfy the rules to access super I'm going to push you gently to really consider if taking money out of super is your best option. You need to make decisions about your money that suit you, but I want you in the best financial situation possible.

I reckon you will be paying 2.6% to 3% on your mortgage. But now we need to look at the long-term returns from your super. Including the GFC in 2009 and now Covid-19, when markets copped a bit of a beating, if you are in any decent, low-cost super funds holding a diversified portfolio of assets in something like a balanced option, I think you will have been averaging more than 7%pa in returns.

Obviously, we would all prefer to earn that sort of return on our money than pay off a mortgage costing us under 3%. Here I think it is fair to assume that your mortgage interest rate will remain very low for some time. So the question is, do we think your super will provide a better return than the cost of your mortgage?

There are no guarantees, but if Alan plans to keep working for another few years, history shows that a well-diversified portfolio of assets, as in a good super fund, is highly likely to give you better returns.

But if you would sleep better with the mortgage paid off, that is fair enough. Alan, though, would probably need to "cease an employment arrangement" to access super as a lump sum. You would need to seek advice about this. But in your shoes, I would use my income to pay down my mortgage while leaving my money in super, at least until I fully retired.

In terms of buying in Geraldton, this decision I would have to leave to you. At the end of the day, property appreciation will depend upon local economic and population growth, so it would be critical for you to understand these two factors.

I have no problem with owning investment property in growth areas, but I suspect going down this path would require your super money.

Personally, I would prefer to invest in globally diversified assets in a good, low-cost super fund. Do your own research and seek unbiased professional advice if needed.

But this is your call. It is your money and your future and there are many paths to financial success.

I wish it were all a lot simpler, but I hope this is of some broad guidance.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the television show Money, radio, and most notably this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is Chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.
Comments
Lynneo Clark
December 2, 2020 5.07pm

60 years old and a mortgage $450,000+! Man, my advice would be to sell that anchor around your neck and get out of debt before even thinking about traveling! And adding more debt with an investment property is sort of crazy?

Celi Drake
December 2, 2020 5.40pm

Oh I agree with Lynneo - sell that Anchor : ) live simply. That debt at that age is a nightmare

Graham Paull
December 3, 2020 9.38am

A few percent interest on a mortgage is not an anchor however 8 or 10% would be an anchor .

if you do pay off some of the mortgage that money is no longer being actively invested in fact it's a waste.

if you can't get an average of around 7% return on a super fund you need to change your SuperFund.

your property will still be appreciating regardless of whether the debt is paid off or not. What difference is it going to make if you pay the debt down now or in 5 or 10 years time?

If a property is appreciating more than the interest rate then you will always be a head.

If I had a million-dollar dead and was 2% ahead of growth of my mortgage rate that would be an additional $20,000 a year.

How many people would love to have that anchor?

Kim Davis
December 5, 2020 7.43am

I would love that anchor. Beats renting and possibility of homelessness after retirement after working all your life. I'm 55, single with a new 570K Sydney mortgage and 200K in super. Thanks for your comment Graham.

Charlie G
December 16, 2020 1.15pm

Hi Paul,

My wife and I just pay off our home. We are 50 and now are planning on focusing on our super. We both have separate super funds, both with Australian super, and currently have a combine super of $700000.

What I understand and correct me if I am wrong but all Australian strong investment seem to be mining and the banks. But banks are heavily investing in property and our relationship with China has gone south.

Should I still leave our money in Balanced or should I just invest in international shares, the the thinking that there will be a fast market recovery then leaving our funds exposed to the Australian market.

Kind Regards

Charlie

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