Ask Paul: Am I better off putting extra cash into super or the mortgage?

Q. My wife and I are 58 and 57 and looking to retire at 67. We have a nice house worth about $700,000 but still owe $420,000 at 3.79%.

We have healthy super balances totalling $515,000 and currently salary sacrifice $100 a fortnight, as we have good government jobs earning $85,000 and $45,000 respectively.

We are paying about $800pm extra into the loan to reduce it as much as possible before retirement in nine years.

We calculate we will have about $700,000 in super at 67 and still owe about $300,000, so we would be able to pay this out and have the magical figure of $400,000 left to access a full pension.

However, do you think it would be better to put the surplus $800 into our super by salary sacrifice rather than into the home loan after tax? - Mark

A. Well, Mark, this is a tax game. Once we earn above $37,000 we start paying tax at 32.5% plus the 2% Medicare levy. Salary sacrifice sees 15% tax coming out of your pre-tax contributions.

By not salary sacrificing it means that you make a choice to pay some 34.5% tax (and more on the top part of your salary) rather than 15%.

Contributions to super save you a lot of tax and mean you have more to invest. Super funds have averaged over 9%pa since compulsory super started.

There is no guarantee that this will continue but I would be pretty surprised if, over the long term, super fund returns were not higher than your mortgage rate of interest of 3.79%.

So it seems to me that you should be better off topping up your superannuation, paying less tax and hopefully earning returns higher than the interest rate on your mortgage.