Many financial planners agree that salary sacrificing is an excellent way to save and avoid paying high levels of tax, at least on some of your income, but is it really better than paying down your mortgage? Financial planning advice usually offers many ways to save money and reduce your costs; but whether this is one of them will depend on your specific circumstances.
For instance, if you are in a very high tax bracket, it can certainly pay you to salary sacrifice, especially if having done that, your income is then in a lower tax bracket level. But it is not always the best thing to do as far as making the most of your dollars goes. It absolutely depends on your individual circumstances, which is why it is best to consult with a financial advisor; one who works independently of any company such as a bank.
Remember that your mortgage is not tax deductible – at least for most people. If you are paying the marginal rate of tax, any payment you make off your mortgage will be affected by that tax. In other words, the tax cut will come out of it before it goes to pay off the mortgage.
What you need to take into account is
- Your marginal tax rate on your salary.
- The interest rate on your mortgage
- The return you get on the funds invested in your superannuation
- Your age – if you are young, you are further away from accessing your superannuation so it may make more sense to pay off the mortgage
- Your debt levels compared to your assets. If the former are very high, it may be better to pay them off
- Your financial goals. For some people, being in debt is nothing as they look at the overall picture. For others, getting out of debt is really important.
Generally speaking, if the marginal tax rate you have to pay on your salary is 30% or more, you would be better off salary sacrificing into your superannuation fund. But if the marginal tax rate you are paying is less than 30%, it may be a better proposition to pay off the mortgage. However, this does depend on investment returns from the super fund and the interest rates on your mortgage.
That said, general advice is usually to be avoided because it doesn’t take into account your specific aims, goals and needs. That is why consulting with a financial advisor is a better solution. You can tell them what is most important to you and advise them of the specifics of your financial situation. Only when all this is taken into account, can the advice given be said to be suitable for your unique situation.