Ask Noel – Thursday, 26 November 2020

Question

I’m reading your new book Retirement Made Simple and hope you can clarify something I’m confused about. I thought, irrespective of whether you are  income tested or asset tested,  you could only earn $300 a fortnight as a pensioner couple . We will be asset tested and I have worked out using your superannuation calculators that I will probably have about $600,000 in super. Given those circumstances, can we earn more than $300 a fortnight without our part pension being affected.

Answer

You have highlighted an issue which confuses many people. The pension eligibility tests work on an asset test and an income test and the one that produces the lowest pension is the one that Centrelink uses. From 1 July 2020 a couple can earn $316 a fortnight combined and still be eligible for the full pension under the income test. Once income exceeds this level the pension reduces by $0.50 for every additional dollar earned. The tests are way out of kilter – the lower limit for a homeowner couple for the assets test is $401,500 after which the rate reduces by $1.50 a fortnight each for each $1000 of assets in excess of that threshold.

If we assume your assessable assets are $640,000, which includes your financial assets and items such as vehicles and furniture, you would be eligible for a pension of $708 a fortnight combined. You could earn a combined income of $1800 a fortnight, and still be assessed under the assets test. In short, the income test is not relevant for anybody who is asset tested.


Question

I am 51, single, and earn $200,000 gross a year.  I currently rent, and rent out my home interstate, which is worth $500,000 with a $200,000 mortgage.  I am considering selling this house and buying a flat on the Gold Coast for my retirement in 5 to 10 years.  I have $300,000 cash and $300,000 equity on my house available for investment. 

I want to invest in shares via index funds but am concerned about the changing government super laws and integrity of my defined benefit company super fund.  Should I invest in shares outside super with an equity loan and/or make additional after tax cash contributions to super?  My super is worth $500,000 and I make the maximum concessional contributions.  Should I consider a SMSF or fund not associated with my employer?

Answer

I suggest you use the best of both worlds. Continue to salary sacrifice to the maximum but keep increasing your net worth by borrowing for assets in your own name to keep them outside the superannuation system. There are advantages and disadvantages in having your own fund – they are canvassed in detail on the ASIC Money Smart website. A SMSF could be useful if you intend to be an active do it yourself share investor.


Question

I am 60 and am working full time.   My super balance is $460,000 We have sold an investment property for$950,000. The purchase price was $130,000. how do I reduce my capital gain tax bill using superannuation?

Answer

This is a warning to anybody to take advice before signing a contract where a substantial amount of CGT may be payable. The only way to use superannuation to reduce capital gains tax is to make concessional contributions to reduce your taxable income in the year the sales contract was signed. The problem is that total concessional contributions from all sources cannot exceed $25,000 a person a year. You use the term “we” so I assume the house was in joint names. Therefore, the gain will be calculated by subtracting the base cost from the net sale price. On the figures provided, your total gain may be around $780,000 which will be split in half by application of the 50% discount. This means $195,000 will be added to the taxable income of both parties to calculate the CGT. I assume your employer is making compulsory contributions for you. If these are $10,000 a year, you only have $15,000 left to make a concessional contribution in your own name – possibly the joint owner could contribute $25,000 if they had no other superannuation. Obviously tax deductible contributions won’t too much to reduce your CGT.


Question

If I salary sacrifice a large sum of money, can I use this as a lump sum when I retire?  Does the money which my employer puts into super have to be used as an account-based pension?  Once I have sacrificed money to super is it out of my control or could I request a large sum in one hit, for example the cost of a new car, above my agreed allocated pension sum in one year?

Answer

Under the current rules you can take all your superannuation as a lump sum once you reach your preservation age and/or satisfy a condition of release if you are under 65.  Therefore, there is no reason why you couldn’t make lump sum withdrawals as needed when the time comes.


Ask Noel – Tuesday, 17 November 2020

Question

I am 58 and my husband is 65.  We both work full time and salary sacrifice the maximum into super.  I earn $120,000 a year, and my husband earns $113,000 a year.  He has $470,000 in super and I have $450,000.  We still have a mortgage of $367,000 on our family home worth $1.6 million.  My husband hopes to retire at 70 in five years.  Are we better off paying down the mortgage over the next five years or making after tax contributions to super?

Answer

It’s great that you’re planning now to make the best of your retirement years. The interest rate on your mortgage should be no more than 3% per annum, and I would hope that the returns on your superannuation fund will be at least of  7% per annum. Therefore, I think you are perfectly placed to maximise your non-concessional contribution to superannuation. There is no entry tax on these contributions, and they also reduce the overall taxable component of your fund.

The concessional contributions you are making to super will be $21, 250 a year each after allowing for the 15% contributions tax. If your funds earn 7%  husband’s super should be worth around $780,000 when he retires at age 70. If you work to age 65 your superannuation should be worth $900,000. The non-concessional contributions will boost these numbers even more.


Question

My wife and I retired  two years ago and we both took our defined benefits as income steams at that time. We are self-funded and currently over our preservation age but under 60.

Due to COVID, I started casual work as a contractor and work approximately three days a week through a skilled labour supplier. In this agreement, I am performing work for my original employer. We have also moved closer to my aged parents and sold our house. 
We are now looking at buying a new more expensive property. I was planning to take a cash lump sum superannuation  payment from my secondary accumulation fund, separate to the defined benefit. Will the  lump sum withdrawal meet the tax office rules considering my casual work?

Answer

Based on the information provided there may be an amount that can be withdrawn. Your first task is to get the latest statement from the fund that has the accumulation balance to see if there is any amount which is unpreserved from the old rules. This is unlikely and you will probably find that all your funds became unpreserved when you retired.

However, your fund may require you to satisfy them that you did actually retire, if you did not notify them at the time. Any contributions and earnings after you recommenced work will, in your case, be preserved until you satisfy a condition of release. In essence until you turn 60 you have to retire to access those amounts. Your partner may be in a different position. In short, there is no simple answer – you need to liaise with your fund to find out where you stand now.


Question

My wife and I are in our mid 50’s and have about $500 a week each for investing.  Neither of us has much super – we are both reluctant to pour money into super.  What can we sink our money into that will give us the best return over the next ten years – super, an investment property, a property trust or syndicate, managed funds, blue chip shares, anything else?

Answer

There are two important factors to consider – the type of investment to hold and the best entity to hold it in.  For a person in their mid 50s earning more than $37,000 a year the perfect investment is super because you can usually invest in pre-tax dollars using salary sacrifice.  Because salary sacrificed contributions lose just 15% and money taken in hand loses at least 39% you are making big tax savings immediately.  Once the money is inside super you and your adviser can decide what sort of asset mix is appropriate for you. The cream on the cake is that income tax on the fund earnings is just 15% per annum while you are working – and then zero tax once you retire and start a pension from the fund.


Question

I am 65 and will be  applying for my UK and Australian aged pensions on my next birthday in May. I left UK at aged 35 and have been advised I shall receive £80 per week from UK as part state pension.

In addition I receive a monthly pension for life from my former UK employer Nat West Bank £438. I only have $200,000 in Australian super. Will I have to pay Australian tax on my pensions?

Answer

The pension income will be taxable, but you will get a credit for tax paid in the UK as well as an 8% deduction for return on capital.  Also, thanks to the range of offsets available, you may find that zero tax will be payable on your overall income.