I’m 73 with $19k in credit card debt. Should I use my savings to pay it off?

I am a 73-year-old widow and part of the generation of stay-at-home mums who did not accumulate super. I worked full time until age 71. I now own a small apartment and have $100,000 in savings. Until recently this money was in a super accumulation account, but after reading warnings about a possible market correction, I became uneasy. At my age I don’t feel I have the luxury of riding out market downturns, so I withdrew the money and placed it in a high-interest savings account paying 4.5 per cent monthly. The interest helps supplement my age pension, particularly when large bills such as strata levies fall due, although I know inflation will slowly erode its value.

Complicating matters, I have a long-standing credit card debt of $19,000 at 13.99 per cent interest. I have been paying only the minimum for several years and, with only about $200 a month spare from my pension, the debt is reducing very slowly. I know the debt should be paid out, but I am frightened to do so because it would reduce my savings to about $80,000, which I have no realistic way of rebuilding. Would you have any suggestions?

It makes no sense to keep money in a savings account earning 4.5 per cent while paying 13.99 per cent on a credit card. That interest gap is costing you close to $50 a week – money you simply cannot afford to waste.

I suggest you reduce the balance outstanding to a token amount of $10, so the card remains open. If you pay it off completely, there is a risk the card could eventually be cancelled, leaving you with no chance of replacing it.

You are not really reducing your safety net – you are improving it by eliminating a guaranteed loss. If an emergency arises, the credit card is still there as a back-up, but meanwhile you stop the steady drain on your cash flow.

Once the debt is gone, the remaining savings can sit in a high-interest account, giving you peace of mind and flexibility without the anxiety of watching a high-interest debt quietly eat away at your pension income.

I am 55 and my wife is 54. Our superannuation balances are $620,000 and $180,000 respectively. We owe $500,000 on our home but have $250,000 in cash sitting in an offset account. Is it advisable to take money out of our offset account now and pay off the house, thereby eliminating interest? If we did that, would our retirement income be a lot less? We expect to work for another 10 years. My salary is $146,000 a year and my wife earns $95,000.

I would hope that your superannuation is earning more than the interest rate you are paying on your mortgage, and on that basis it makes more sense to use the spare $250,000 to boost your super rather than pay down the loan.

You can do this tax-effectively by making additional concessional (tax-deductible) contributions, which are currently capped at $30,000 a year, with a possible increase to $32,500 after June 30, although that is not yet certain.

Your employer should be contributing around $17,500 a year to your super and your wife’s employer about $11,400, leaving you space to make an additional deductible contribution of about $12,500 a year and your wife of $18,600 a year.

If this strategy is maintained for the next 10 years it could increase your combined superannuation by around $400,000. You are already well-placed for retirement: in 10 years your super could be around $1.6 million and your wife’s about $560,000, with the extra $400,000 very much cream on the cake.

The tax refunds generated by these deductible contributions could then be used to speed up repayments on your home loan.

I have a query about clearing the taxable component of super once you turn 65. Is it better to open a new super account and transfer tax-paid contributions into that account so that, over time, the new account would theoretically consist entirely of tax-paid money?

Super law requires that the taxable and tax-free components be dealt with proportionately when transferring to a new super account, so you cannot cherry-pick only the tax-free component to be carried over.

However, you can use a withdrawal and re-contribution strategy whereby you make a withdrawal from your super and then make a non-concessional contribution with that money into a separate super account containing only a tax-free component. Note that if left in super accumulation phase, any earnings will then create a taxable component.

You’ve often written about the work test for contributions to super, but I’ve heard that there is a one-off exemption if your superannuation balance is under $300,000. Could you please explain how this works?

Mindy Ding of the Entireti Technical team confirms there is a one-off work test exemption available to Australians aged 67 to 74 who want to make a personal super contribution and claim a tax deduction for it.

Normally, to claim a deduction for contributions made on or after your 67th birthday, you must meet the work test, which means being gainfully employed for at least 40 hours in any 30 consecutive days during the financial year in which the contribution is made.

However, you can be exempt from this requirement in the year after you last met the work test, provided all the following conditions are satisfied. Your total superannuation balance was less than $300,000 at the end of the previous financial year. You met the work test in that previous year. And you have not previously used this exemption, as it can only be used once in your lifetime.

This exemption is designed to help people who have recently retired and have relatively modest super balances, allowing them to make a final deductible contribution even though they are no longer working.

It’s also worth noting that between ages 67 and 74 the work test, or this exemption, is mainly relevant for claiming a tax deduction on personal contributions. Non-concessional contributions, and employer or salary sacrifice contributions, are not subject to the work test.

Noel Whittaker is author of Retirement Made Simple and other books on personal finance. Questions to: noel@noelwhittaker.com.au

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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