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19.08.2008Should I add to super or pay off debt?


The other thing to consider is that reducing debt improves your equity in the investment, but it will not make your investment go up in value any faster. That is, you can't improve the quality of your investment by reducing debt (the old purse out a pig's ear trick!).

We've compared salary sacrificing into super with a strategy of borrowing to fund non-super investments at various tax rates. Remember that this type of analysis relies on tonnes of assumptions (shown below) so keep that in mind.

The gearing option will provide a better result than the non-gearing option. But when compared to superannuation salary sacrifice, the super alternative produces marginally superior results over all periods. This has a lot to do with the fact that Capital Gains Tax is payable when you exit the non-super investment, but the withdrawals from super after age 60 are completely tax free.

If you are in the 31.5% tax bracket, then the super result can be enhanced through the Government co-contribution scheme where your $1 after tax contribution into superannuation is matched by $1.50 from the government. That's a guaranteed 150% return!

You should also note that the salary sacrifice option does not have the increased risks of borrowing associated with gearing strategies. The table below shows how sensitive your total nest egg is to rising interest rates when borrowing is used versus superannuation (assuming 46.5% personal tax rate): 

To be fair, the benefits arising from salary sacrifice contributions will be subject to preservation. You cannot generally withdraw funds from super as a lump sum until retirement on or after preservation age (55 but phasing to age 60 for those born after June 1960). You can commence a non-commutable income stream under the transition to retirement rules on or after reaching preservation age - but only if your scheme allows it.

There are no specific tax or superannuation laws, which prevent you from salary sacrificing 100% of your salary. However, there may be restrictions imposed in awards or industrial agreements - so you must check these first by speaking with your employer. Not to mention the cashflow aspects of salary sacrificing 100% of your income - you may still want to eat!

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