Ask your adviser

At retirement, being debt free is ideal. However, in the lead up to retirement, maximising the size of your super savings and legitimately minimising the amount of income tax you pay is a vital consideration.

You may be able to start a transition to retirement (TTR) pension, which allows you to contribute part of your salary to superannuation in pre-tax dollars (known as salary sacrificing). At the same time, you can access your super in the form of a tax-effective income stream.

Depositing your inheritance into super could significantly improve the size and tax-effectiveness of this income stream. By maximising your salary sacrifice, you could reduce the total tax you pay by around $7,000 per annum. This tax saving along with the tax-effective income stream from a TTR pension could then be used to speed up the repayment of your mortgage.

Whether you should focus on reducing your mortgage, building your super or a combination of both depends on your personal circumstances, financial markets and current tax rates. I strongly recommend you seek personalised financial advice to confirm what is most appropriate for you.

I see two key objectives for retirement – being debt free and maximising your tax-effective savings.

Your views about investment risk would need to be explored. It is as much about whether you view investment risk as an opportunity or something to be avoided.

In either case, you should free up cash flow to allow an increase in salary sacrifice contributions to super. Thus:

• 1. If you are a conservative investor – paying off the mortgage and eliminating the need to make monthly loan repayments.
• 2. Otherwise, with the right fund, setting up a transition to retirement pension, perhaps using some of your existing super, to provide cash flow to repay the loan over time.

Whatever your risk profile, the important thing is to look to the things you can control and be disciplined. The best you can do is to eliminate real 'leakage' of your money – that is, through paying unnecessary tax, paying the bank interest or paying high fees for an investment. You have a great opportunity to do all of this with careful planning.

Besides planning to build up sufficient funds in super to provide a desired retirement lifestyle, it should also be a goal to retire debt free. When an additional sum of money becomes available, often the safest route is to reduce the mortgage rather than make additional contributions to super.

Given that home loan interest is non-deductible and the current interest rates are approximately 7% per annum, the sum invested in superannuation would need to generate a return greater than 7% after tax. With the low base Australian and international shares are currently at, this is a realistic expectation, however, still a risk given the guaranteed savings from a reduced mortgage.

With the mortgage out of the way, the focus should now be on additional super contributions. Given that you are earning $80,000 per annum, your personal tax rate is 31.5%. This means any salary sacrificed contributions would provide a real tax benefit of up to 16.5%, i.e. 31.5% marginal tax rate less 15% super contributions tax. Being over age 50, the limit for salary sacrificed plus superannuation guarantee (SG) contributions is $50,000 for this financial year.