Loan Repayment or Additional Super?

Clients often ask whether it is more efficient to use spare cash to make a loan repayment or to top up their superannuation. In my view, there is no default answer and it really does depend on your personal circumstances. Having said that, the following general observations are worth noting:

• Superannuation locks the money away and you cannot access it until you meet a superannuation condition of release, such as when you reach the age of 65.

• Making a loan repayment reduces your debt and improves your financial security. It also means that you will pay less interest going forward as the loan principal is now lower.

• Repaying a loan with a redraw facility means you may be able to access the cash when you need it, especially in emergency situations. On the other hand, you may be tempted to make discretionary spending if you are able to redraw.

• Your tax position may influence the decision on whether to make additional contributions or to make a loan repayment. Depending on your marginal tax rate and subject to certain conditions, it may be more tax effective to make an additional superannuation contribution rather than a loan repayment.

• You should compare the current and likely interest rate applicable to the loan against the expected return on the investment in superannuation that the extra cash will be used to make. For instance, if the interest rate on the loan is low and forecast to stay low, but the expected return on the investment in superannuation is higher, it may be worth putting the extra cash into superannuation instead of making the additional loan repayment.

You should consider these points and seek professional advice to ensure your course of action is suitable in your circumstances. We will be happy to provide advice on this topic and help you implement the strategy as part of your financial plan.

GENERAL ADVICE WARNING: The above is general advice only and does not take into account your personal circumstances or objectives. You should seek your own independent financial and tax advice to ascertain whether and how the above applies to your particular situation and whether it is likely to meet your objectives, prior to making any financial and investment decisions.