How Paying More into Super Can Get You a Home
One of the really important ways of getting ahead is to make maximum use of any government programs or contributions to help you get there.
It is true that government programs can be clunky and inflexible to use and often involve some complex paperwork but it is important to work past these limitations if the prize is really worth pursuing.
Superannuation co-contributions are a great example–used long term they can really turbocharge your retirement nest egg and can also be good for covering over any time away from the workforce, particularly in a household situation.
First Home Super Saver Scheme
One of the newer programs that has received much less attention than it deserves is the First Home Super Saver Scheme (FHSSS), which effectively allows you to save for a home deposit using your superannuation account.
Financial planners who have crunched the numbers believe a couple who are both on the top tax rate who combine the scheme with a high interest savings account can raise up to an extra $22,000 over three years, which makes this an option really worth considering.
That is the absolute optimum situation and naturally involves higher incomes that mean this scheme is better suited to those on the top tax rate.
Some Mental Gymnastics Required
It takes a certain amount of mental flexibility to use a long term, normally inaccessible savings plan like superannuation as a way to supercharge a shorter-term house deposit goal but the rewards can be worth it.
The key to the plan is to salary-sacrifice extra pre-tax contributions into super – being careful not to overshoot allowable contribution limits – before withdrawing them plus earnings for a house deposit under the FHSSS program.
While salary-sacrificing into super would usually conflict with short-term savings goals such as saving for a home deposit, the first home super scheme can work in combination with savings outside super.
Before starting to use the scheme, it is important to check that it suits your circumstances and you are eligible here.
Tax Savings Are the Key
The key to the scheme is the tax savings which can be significant.
Salary sacrificing into super is only taxed at 15%, which is a long way short of the 39% maximum tax rate, and investment earnings are added to the pot that can be withdrawn at the close of the scheme when you are ready to buy a house.
Scheme users can contribute up to $15,000 per financial year and up to $50,000 in total.
To illustrate how much more effective the scheme is to saving outside super, saving $15,000 each a year in after-tax money equates to $25,590 in pre-tax earnings outside of super.
That is a massive difference and if you also manage to bank the tax saving outside super, the combination effect can produce a much larger deposit more quickly.
At the end of the savings period the withdrawals are taxed at your marginal tax rate less a 30% offset, which means each member of a couple who saved the maximum amount each year for three years would be $10,882 better off than saving using a bank account and after-tax income.
Scheme Won’t Suit Everybody
Of course, there are complications and not everyone will be better served by using the FHSSS.
To be eligible, you must be 18 or over, be a first home buyer, intend to live in the home for at least six of the first 12 months after purchase and your name must be on the title of the property you buy.
Voluntary contributions don’t include the compulsory contributions made by your employer under the 12% super guarantee, so you need to bear in mind that the annual concessional super cap of $30,000 also includes those super guarantee payments.
It may not be for everyone but it is certainly worth checking how the scheme would work in your individual circumstances.
After all, when the Government is offering concessions there is not too much to lose and plenty to gain.