Question 1

• I read your post about not being able to contribute to superannuation after age 75. Why would you want to? I don’t understand what benefits if any superannuation offers.

Superannuation is highly tax effective. That’s why there are caps and age restrictions on getting money into it.

There is also a cap on how much you can have in a superannuation pension/income stream, which is increasing to $1,900,000 from 2023-24.

Earnings within super are concessionally taxed and once you convert the funds to a pension then all earnings and payments are tax free.

For example, let’s say you earn income from salary and non-super investments of $100,000.

You would only get to keep about $75,000 of that, as $25,000 would be payable in income tax. Whereas if you received $100,000 from your super pension, you get to keep the whole lot, no tax!

There have been some recent reports around the fact that the super tax concessions are too generous and may be wound back as they are costing the government a lot of money.

The government is currently trying to legislate the ‘objective’ of super. In other words, what is super for?

You will note (see below) that part of the proposed objective includes ‘equitable and sustainable’, which can be read ‘not too many tax benefits for those that can take care of themselves without additional tax breaks’.

The other concern is that it may enhance inequality.

Some wealthier individuals don’t need the income from super, so they use it as a low-tax estate planning tool in order to pass on the benefits to their children. That is why ‘deliver income’ is also included in the proposal.

Hence, there are plenty of benefits in putting money into super.

The hard part is getting the money into super first. That’s why regular small contributions from your employer over decades works well for most people.

Question 2

• I have $1.2 million in super, am 60 years old, and have a mortgage of $300,000. I’m still working full time but considering taking a flexi-pension for the next 2.5 years so that I can pay off my mortgage under the transition to retirement option in three hits (one now, one in July, and a third in July 2024). Can you tell me what the pros and cons are?

Yes, you can start a ‘transition to retirement’ pension once you are preservation age, which is moving to age 60 for everyone.

With a transition to retirement pension you can withdraw between 4 per cent and 10 per cent of your account balance each financial year. So, you could draw 10 per cent before the end of this financial year of about $120,000 (10 per cent of $1.2 million). Then, as you said, make further withdrawals in July 2023 and July 2024.

The main advantage, of course, is that you will have paid out your mortgage. And all payments made from your super after age 60 are tax free.

As interest rates rise this becomes more of an advantage. You are basically getting a guaranteed return of whatever your mortgage interest rate is. Currently that could be anywhere between 5.5 per cent and 7.5 per cent per annum, depending on your lender and set-up.

The downside is that you will be depleting your super and have less for retirement.

Whether the strategy is optimal will depend on whether your super achieves a better return than your mortgage over the next 2.5 years. No one can reliably predict that outcome.

If you do decide to go ahead with your transition to retirement strategy, one thing I would recommend is that as soon as you have the mortgage paid out, start re-contributing to super to build your balance back up.

Home mortgage repayments are a great way to force savings, especially for those who would otherwise not save.  Therefore, keep that savings habit going by contributing to super once you don’t have that debt.

Question 3

• I do not own a house, but currently rent and live on the age pension with no other income. I am due to inherit quite a large sum (enough to buy a very nice house), and want to know if I spend that money on a house to live in, will it affect my pension? 

There are many Centrelink, tax, aged care and other policies which favour home owner over non-home owners.

If you purchase a home, then the value of your home will not be counted under the assets or income test, and hence not affect your age pension.

While it’s true non-home owners can have a little more in assets before their pension is affected (about $225,000) the average home is obviously valued at way beyond this.

However, spending all of your money on a large expensive home just to get a full age pension is not what I would recommend.

You should consider seeking financial advice over your inheritance to take into account your exact situation.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.

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