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Forward Thinking Magazine : April 2011
6 Nick is 55 and in full-time work and on the 38.5% marginal tax rate (MTR). He has an SMSF. All his super balance is classified as taxable component, having been accumulated entirely from employer contributions. He is already salary sacrificing concessional contributions of $50,000 into superannuation each year but doesn’t need to start a TTR pension to fund any of those contributions. He expects to retire at age 65. At that time all his super would (under current law) be able to be withdrawn tax free, so he could use some orallofittopaydownhis non-deductible home loan at that time. In circumstances where a person is considering drawing a TTR pension for no other purpose than to pay down a home loan, the issues can be simplified along the following lines: 1. How much peace of mind will be gained from accessing capital and paying down the home loan earlier than might otherwise be the case, bearing in mind that eventually the whole super account will be available on a tax-free basis (e.g . once the client turns age 65) to pay down the home loan? 2. How does drawing on super to pay off the home loan earlier ultimately affect the person’s overall wealth? 1. Peace of mind / access to capital The comfort gained from paying down the debt earlier is often really a matter of ensuring that debt is removed or reduced to a manageable level in case some unforeseen adverse event occurs prior to age 65 or retirement, such as loss of work and income through retrenchment or injury, etc. One of the key considerations here is: would the super be accessible if one of these events occurred? Here we need to bear in mind that a client who is old enough to start a TTR pension is old enough to qualify for unconditional release of benefits under the “retirement” condition of release (as well as potentially qualifying under conditions of release such as permanent incapacity, compassionate grounds etc., depending on the circumstances), so the person’s likely work status and intentions may be relevant. 2. The wealth numbers Focussing on tax outcomes (and ignoring social security considerations), working out whether a TTR pension should be used to pay down a home loan involves comparing how much wealth a person would have after the strategy is complete (e.g. at retirement at age 65) with how much wealth they would have if they used their super in other ways. In this regard it is useful to look at the following 3-way comparison. Is it worth starting a TTR pension just to pay down the home loan? MAStech