Which alternative is best depends on the salary of the executive, and their overall savings capacity. However in today’s low interest rate environment, it can be better to maximise superannuation contributions.

Case study scenario

Take a 40-year-old executive who earns $250,000 a year, has a home loan of $500,000 at an interest rate of 5 per cent per annum and needs $100,000 to fund the family’s needs, excluding home loan repayments.

Without salary sacrificing any amount to super, this person would have a savings capacity of around $60,000 per annum. They could direct these savings towards the repayment of their home loan, which would take approximately 12 years. Over that time, interest costs on the loan (at 5 per cent) would total around $162,000.

For this person, due to the required employer superannuation contribution of 9.5 per cent, the maximum additional superannuation contributions via salary sacrifice would be approximately $6,250 each year. Such an arrangement would save the executive around $2,900 annually in personal income tax.

The executive’s net after tax income would fall by around $4,000 per year due to the salary sacrifice arrangement, which would impact their ability to repay their home loan.

The home loan would then take around one extra year to repay, costing an additional $16,000 in loan interest as a result.

However, the main benefit is the accumulation of additional money to fund retirement. Taking into account the 15 per cent contribution tax and the super fund earning 8 per cent per annum over the 13 years, the executive could boost their superannuation savings by around $105,000.

Comparing the extra super to the extra loan interest, the net benefit of the strategy for this executive would be around $89,000.

If loan interest rates went to 10 per cent per annum and superannuation investment earnings averaged 3 per cent each year, the strategy would still break even.

The power of compound earnings means that contributing extra to superannuation while also focusing on the reduction of your home loan is a smart long-term strategy.

The information provided above is general information only and does not take into account your personal circumstances.  Individuals should seek specialised advice from a qualified financial adviser prior to implementing a strategy based on the above information.   Please contact Hewison Private Wealth for more information.