Question 1

• I am 76 and my wife is 69. We are both drawing down the minimum percentage from our SMSF, which has a managed fund with $900k. We also have $600k in an industry fund that is performing better (drawing down from that also). So overall about $1.5 million. I want to know if it’s possible to get the Centrelink pension by closing down the SMSF and spending say $1 million, with some of it being on the kids. Self-Funded Retirees (SFRs) are treated unfairly, as nearly $2 million is needed in capital to generate similar income to aged pension.

Firstly, to your comment that self-fund retirees are treated unfairly as you need $2 million in capital to generate a return equal to the aged pension.

I would not necessarily agree with that statement, as you can draw down as much as you like from your super and have a much higher income than that provided for age pensioners.

The other benefit self-funded retirees receive is in the form of tax concessions when their superannuation is in the retirement phase, as this is a tax-free earnings environment.

On a balance of $1.5 million earning a 7 per cent return there would be a tax saving of more than $15,000, as opposed to holding this in superannuation, and probably even more if the money was held outside superannuation altogether.

There is still some school of thought that you should only live off the interest of your super; however, that is not the purpose of superannuation.

Fair enough, there is confusion because a specific purpose has not actually been agreed upon.

Another reason why there is confusion is that super funds emphasise an account balance rather than how much of an income stream that could turn into at retirement.

Hence another reason why the government is proposing to soon legislate the objective. The below is the proposal:

The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.

You will note that the proposed objective is not to build wealth in a very tax-advantaged environment, live only off the interest, so you can then pass on that wealth to your kids.

Of course, there is nothing stopping you doing so if that is what you wish.

You can, and perhaps should, spend down some of your funds to enjoy your retirement. This may include gifting some funds to your kids so you can see the benefits it brings them while you are still alive.

However, Centrelink has what’s known as deprivation rules. Deprivation may arise where a person disposes, destroys or diminishes the value of an asset or income without receiving adequate financial consideration.

Basically, if you give away money or buy things for anyone else without receiving financial compensation, deprivation will apply.

You can give away up to $10,000 per year or $30,000 over a rolling five-financial-year period without deprivation applying.

What happens if you give away more? Then Centrelink will still treat the funds as yours for the next five years, i.e., still count them as an asset and deem them as earning income over that period.

As members of a couple, and if you are home owners, you would only be eligible for a part age pension if your assets (not including your home) go below $1,003,000.

This figure is indexed, and if you start drawing down on your funds there may be a point where you become eligible.

Question 2

• At 65 and not working, I have recently moved the majority of my super balance to an SMSF in order to invest in services which preserve my capital and generate a stable and predictable monthly income. Down the line, if I take some of that income as cash, monthly, have I effectively then moved from accumulation to pension phase and if so, what might the tax implications be please? Am I still able to contribute in to my still open industry fund – my total super balance is below $1.7 million but above the test level for a state pension.

When you set up your SMSF you would have been responsible for making some key decisions.

As a member of your SMSF you must also be a trustee (or a director of a corporate trustee).

As part of the trustee responsibilities, you need to clarify whether your funds are in accumulation or pension phase. As you are 65 you can take money out tax free regardless, however, there are other implications.

From a tax perspective, for investment earnings within the fund it is better to hold the funds in pension phase, but you must also then ensure minimum payments are made each year.

If moving the funds from accumulation to pension within your SMSF, this must be documented in the trustee minutes.

Yes, you can still contribute to super, whether it’s an industry fund or an SMSF, so long as it’s in accumulation phase.

I suggest reviewing your responsibilities and ensure you receive appropriate advice in relation to your fund.

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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