It’s better to be safe than sorry with the deposit
Catherine is manager at Advice Services Australia. She is a certified financial planner and a self-managed super specialist.
The decision on where to “park” your money until you buy your property is largely driven by how long it will be invested. As David is almost there with saving for his first home deposit and has a short time frame (within the next 12 months) I would prefer to see him place his savings in a cash and/or fixed-interest based investment such as a high-interest bank account or even a term deposit.
As interest rates are low, this option may seem a little boring; however, it’s better to be safe than sorry. If David parked the money in shares or property and there was a market dip within the next 12 months, it would mean that he would have less money for his deposit. When investing in property or shares you really need a longer time horizon to ride out any dips in the market (for example, five-plus years).
Given David’s age and goal of saving for his home deposit within the next 12 months, I’d normally steer clear of increasing super contributions as the money is preserved (that is, stuck in the fund) until you meet a condition of release (for example, retirement when David turns 60). Having said that, in the last federal budget the government proposed a scheme that will allow first home buyers to save for a home deposit within their super fund – the First Home Super Saver Scheme. At the time of writing, the legislation had not yet been finalised. The government has created a calculator that can assist you with working out the potential benefit of the scheme relative to saving the same amount in a standard deposit account (see budget.gov.au/estimator).
There are differing schools of thought on whether it is worth investing once you have a mortgage or whether you should direct surplus cash to repaying it as soon as possible.
At Advice Services Australia we provide advice that is personalised for each client depending on their circumstances, needs and goals – so we would need to ask some more detailed questions to advise David on whether he should direct surplus cash towards repaying his mortgage, investing in a portfolio or salary sacrificing to super.
One of the advantages of directing surplus cash to repaying your mortgage rather than investing is that you get a guaranteed return on your funds equal to your mortgage interest rate. If you were to invest these funds elsewhere you would need to get an after-tax return equal to your mortgage interest rate to break even.
One of the advantages of investing surplus cash flow is that you are starting to build a more diversified portfolio which will hopefully grow over time (although there is no guarantee with investment markets).
One of the advantages of salary sacrificing to super is that, based on David’s salary, he will get an immediate tax saving for directing funds to super rather than receiving them in his personal name (although once the funds are in super they are subject to strict cashing rules).
As for the pension, unfortunately, due to changes in UK legislation in 2015, it is unlikely that David will be able to transfer it to Australia. At present only fund members over the age of 55 are able to transfer their UK pension to Australia, and only under very strict conditions. There are hefty tax penalties for not adhering to these rules. I would recommend that David seek advice from an adviser in the UK to ensure that any underlying investments within the UK pension scheme are invested appropriately and that he watches this space to see if the rules change.