If you’re nearing retirement and are keen to be debt free when you get there, you may be considering whether taking your super as a lump sum to pay off your home loan is a good idea. But tempting as it might be, it may not be the best option for everyone.
For instance, you may be able to remove or considerably reduce your home loan debt, but depending on how you choose to go about doing this, it could impact the overall amount of money you have left to fund your retirement. Likewise, moving into retirement with debt hanging over your head might not be ideal, either.
It’s important to think about this carefully, particularly as we’re living longer, with many Australians looking at a retirement of 30 years or more.
Here are some questions to ask yourself.
If I spend my super, what money will I live on in retirement?
If you’re leaning towards paying off your home loan or other large debts with your super lump sum, you need to think about what money you’ll live on in retirement.
You may be eligible for government entitlements, such as the Age Pension, but according to the Association of Superannuation Funds of Australia that, alone, is unlikely to be enough.
What are the tax implications around taking my super as a lump sum?
When it comes to taking your super as a lump sum, you also need to think about the tax implications and whether you might need help in terms of how you invest your super savings.
For instance, you may be looking to pay off your home loan right away or you might be thinking about investing your super lump sum and using the earnings to pay off your loan gradually.
It’s important to bear in mind, if you’re under age 60, you might have to pay tax on the lump sum. And, if you invest your money outside super in your own name, you may be taxed on the interest or possibly the capital gain you make.
There’s a lot to weigh up. Taking super as a lump sum can give you flexibility and control, but so can moving your super into a tax-effective allocated pension, which can provide you with a regular income stream in retirement and the ability to still withdraw lump sums.
Are there other ways to pay off my home loan sooner?
If you still have some years ahead of you before you retire, there are a number of little things you can do today to help pay off your home loan sooner:
- Understand your home loan—know what you owe and what you’re paying. Our debt reduction calculator can help give you a clearer picture.
- Consider rolling your debts into one—multiple debts can mean multiple fees and interest charges, and consolidating your debts could minimise what you pay.
- Look at making fortnightly repayments—this small change could make a big difference to your loan, as you’ll make one extra payment a year compared with if you make monthly repayments.
- Use an offset account—this is a savings account linked to your home loan. The amount in your account is subtracted from the principle amount you owe to calculate interest on the loan.
- Make additional repayments—if you get a pay rise or have more money on hand, use it to top up your home loan. See the difference you can make with our extra repayments calculator.
- Take advantage of one-off payments—if you receive a tax return, bonus, dividends or an inheritance, you could use this to make a substantial dent in your home loan.
- Switch to a home loan with a lower interest rate—this could significantly reduce the amount you’re paying but always check the loan fees, features and conditions.
- Downsize to a less expensive property—you could use the profit on the sale of your current home to pay off your loan and buy a new, less-expensive property.
Everyone’s circumstances are different, so it’s probably a good idea to meet with your financial adviser to talk through your options. If you don’t have an adviser, we can help you find one.