My husband and I are 51 and 50, with three dependent teenage sons. We own our home, valued at $650,000 with no mortgage, and an investment house, also valued at $650,000, with $60,000 owing and $440,000 in a redraw account. This has now become positively geared and we are having to pay tax on the rental income. My wage is $87,000 and my husband's is about $100,000 which, with $9000 in reportable super contributions has put us into the Medicare Levy Surcharge bracket this year. This was a bit of a shock. We don't have health insurance because there is no benefit for us in having it. We have super valued at about $220,000 each and my husband also has a small defined benefit super fund, eventually worth about $23,000 as a pension. We have about $230,000 in cash and shares and we would probably look to retire in 10 to 15 years time. Will we have enough to retire with an income of about $55,000 a year, or should we put more money into super? E.S.
Let's say you decide to retire when you turn 65, in 14 years' time. If inflation has averaged 2.5 per cent over the period, you will need roughly $77,500 to buy what $55,000 buys today. If your husband's super pension is $23,000 at the time, you will need to source some $54,500 a year from your savings.
Given that a woman's average life expectancy at that age is a little over 22 years, I prefer to budget for at least a further five years where a person is healthy and slim, and sometimes 10 years where the family has a history of living long.
So to budget to spend $54,500 for 27 years, indexed at 2.0 per cent a year, you could expect to go through $1.2 million in savings that earn 5.0 per cent a year on average and produce an untaxed income.
Put as much as you can into super between now and retirement, after paying off the mortgage and you should be able to meet your goal. Why not add $60,000 of your cash to your mortgage account and pay no further interest on the loan. Yes, you pay tax on the rent but you are still better off after tax.
It's interesting how many people believe a deduction for a loss is better than paying tax on income. But the Tax Office is not stupid. All a deduction does is reduce your loss, but you are still showing a loss instead of a gain.
Recent changes to eligibility for the Commonwealth Senior's Health Card (CSHC) tighten the income test by including income from pensions, which were previously not included. There is however, a grandfathering provision that retains the previous eligibility conditions provided that the pension income stream was not purchased or changed on or after January 1, 2015. It is not clear what is meant by "changed" in this context. I pay myself a pension from my self-managed super fund each year, and this amount "changes" every year according to the statutory limits imposed on minimum SMSF pensions. Presumably this is not a "change" under the grandfathering provisions. However, if I were to roll money from another super fund into my SMSF, that too would "change" my pension, by increasing the balance of my SMSF and thereby also changing my pensions. I can find no definition of what constitutes "change" within the meaning of the legislation, and I wish to remain eligible for the health card. I have other super funds which I might like to roll into my SMSF at some point, but would this automatically mean that I have introduced the sort of "change" that nullifies the grandfathering provisions? Can you clarify this issue for me? B.T.
The rule states that Centrelink customers who were existing CSHC holders as at January 1, 2015, and who had existing allocated pensions (officially called "superannuation account-based income streams") are "grandfathered" i.e. their untaxed super pension continues to be ignored by the CSHC income test. However, for any allocated pension "purchased or changed" since that date, Centrelink's income test will deem the fund to be deeming income at the current deeming rates. These currently assume the first $49,200 of your financial assets, now including new allocated pensions, earn 1.75 per cent for singles ($81,600 for couples) and the rest earn 3.25 per cent.
So it comes down to what is the definition of "purchased or changed". A pension fund can earn money and pay out pensions without being a "changed" pension. If you convert an accumulation fund into a pension, you obviously have purchased a new pension.
Moreover, if you rollover a grandfathered pension into another fund, you are changing income stream providers, resulting in a new pension. So if you go ahead and consolidate two or more income streams, this too will result in a new pension and the loss of grandfathering.
Since January, there have not been many media discussions of defined benefits super and Centrelink part pensions. To me the main problem is the income assessment, which should have been enacted on a minimum income. Combined income should have been means tested. Many people who are on other superannuation schemes do not realise how this scheme has been retrospectively hit. W.H.
For other readers, the writer refers to a government decision to allow people receiving such pensions, mostly from government retirement funds, to have no more than 10 per cent ignored by the Centrelink's income test for the age pension. Due to a flaw in the 2007 rules, this percentage was growing each year giving these superannuation pensioners what was considered an unfair advantage.
The income test allows couples to earn $76,357 a year (singles, $49,200) before the taxpayer-funded age pension cuts out. So if a couple receiving a defined benefit pension have 10 per cent of income ignored and consequently lose the last dollar of age pension, they will be receiving over $84,800 a year for this to happen. Why would they need taxpayer assistance?
If you have a question for George Cochrane, send it to Sunday Money, PO Box 3001, Tamarama, NSW, 2026. All questions answered. Helplines: Financial Ombudsman, 1300 780 808; Centrelink pensions, 13 23 00.