Can I use my SMSF to pay off my mortgage?
YES, provided you are eligible to access your SMSF member benefits and you have sufficient super to pay off your mortgage. A mortgage can be repaid in full by withdrawing a superannuation lump sum payment or pension withdrawals can be used to pay monthly mortgage repayments.
To be clear you cannot use the cash from your SMSF to directly pay your mortgage without satisfying a condition of release. If you pay your mortgage from your SMSF prior to this the withdrawal will be classified as illegal early access. Super monies which are illegally accessed can result in additional personal tax with tax shortfall penalties and interest.
When am I eligible to access my super?
- At 65 you can access your super without any restrictions.
- You can access your super after you turn 60 but before you turn 65 subject to a few hurdles.
- There are some special rules which allow early access to your super but only in extreme scenarios such as release due to terminal illness
Hint – there is no tax on a lump sum payments or pension payments after you turn 60 on pre-retirement or retirement phase pensions.
Accessing super after you turn 60 and retired
Your super is preserved, unable to access it, until you retire.
Retirement can be when you turn 60, you ceased working a job where you were gainfully employed, and you have no further intention of returning to gainful employment in the future.
Retirement can also be turning 60 and after turning 60 you cease working a job where you were gainfully employed. Interestingly, you can cease working a part-time job and keep working full-time which means you do satisfy the definition of retirement.
Example
Fred’s member balance in his SMSF is $600.000. He is 62 and wants to become a grey nomad. He still owes $150,000 on his mortgage. He wants to know his house is paid for before starting his trip around Australia. He is also willing to pick up part-time work as he is travelling. He ceases his full-time job with the mines on 20th June 2024. He provides a notice to his SMSF trustee, and his super benefits are transferred to unrestricted non preserved (UUNP) on the date he stopped working. $600,000 is now fully accessible to him and he can withdraw a lump sum of $150,000 to fully pay his mortgage. As he is over 60 there is no tax on the withdrawal. His remaining super balance is $450,000 and is UUNP. He can draw on that in the future at any time. Any earnings on his super balance and any knew super contributions which he may earn when travelling around Australian are restricted and not available to him until he turns 65 or ceases gainful employment.
Hint 1 – If you have never been employed in the past you cannot retire under the first definition of retirement.
Hint 2 – Gainful employment is working for 10 hours or more per week for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. Examples can include salary, wages, business income (self-employment), commission income. Voluntary work is unlikely to be considered gainful employment.
Accessing super after you turn 60 but not retired
You are unable to withdraw a superannuation lump sum benefit, but you can start taking a transition to retirement pension (TRIS). A TRIS is a pre-retirement pension giving you access to your super after reaching your preservation age of 60 but still working and not retired.
Your SMSF does not receive a tax deduction on the earnings that relate to a TRIS unlike a pension which is in retirement phase, and you can withdraw pension payments up to a maximum of 10% of your pension account balance.
Hint – A TRIS will automatically transfer to retirement phase when you turn 65. Strategic planning is important to ensure you control transitioning to retirement phase to avoid any unintended consequences.
Consider the following before using super to repay your mortgage:
- Earnings on your SMSF nest egg vs interest rate savings on repayment of your mortgage
- Topping up super before retirement vs making mortgage repayments
- Downsizing on retirement and use the excess profit to repay the mortgage
- What is most important to you?
- Securing your home and giving you peace of mind in retirement
- Centrelink pension payments may be higher as super is included in the assets test but generally your family home is not
- Reducing your savings nest egg in retirement
Before making a decision like this one we strongly recommend reaching out to a qualified Financial Planner to provide personalised advice and assistance.