Some years back, before the amount in an allocated pension was included in Centrelink assessments, a press article advised that when the amount remaining in the allocated pension dropped to a low figure of around $100,000, to close the account, due to fees and charges, and invest elsewhere. As I am now in that situation, I would be interested in your comments in view of the present financial situation, and as we are on a part Centrelink pension. R.W.
Your Centrelink pension would count your "grandfathered" pre-January 1, 2015, allocated pension under the income test but reduce the amount counted by a deductible amount that is fixed for the life of your allocated pension.
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This latter is calculated by dividing the amount you invested in the fund by your life expectancy at the time, the result being known as the "deductible amount". The theory behind it was that you are receiving your own capital back spread over your lifetime and this should not count as "income".
If you have a reversionary allocated pension, ie. it continues being paid to your spouse after you shuffle off this mortal coil, then the deductible amount would be calculated using the longest life expectancy at the time. In many cases men marry younger women and thus, given their longer life expectancy the deductible amount is lower than for a non-reversionary pension.
However, if you cash in your super now, or even roll it over to a public super fund, it would be subject to deeming ie. you would lose the "grandfathered" method of calculation, which is usually considered more "pension friendly".
I would hesitate to cash in your pension until you do your sums and determine how such a change would affect your Centrelink pension. If you are in a low-cost public fund, or run your own self-managed super fund pension and do your own tax return etc, you may find you are better off maintaining the status quo. I suspect there is not much in it, either way, in your situation.
My wife and I are both 59 and will retire at age 60. Jointly we earn $230,000 a year, own our house and have two negatively geared investment units with borrowings of $490,000 and $580,000 respectively, earning $440 and $460 a week respectively. We intend to sell off the units to rid us of all debt after turning 60, timing the sales to minimise capital gains tax. We contribute as much as we can into super in the lead-up to retirement. My wife currently has $420,000 in an accumulation super, mine being a defined benefit scheme, full reversionary to my wife. Joining our finances, we have three options for the future: (a) $52,834 as a full CPI indexed pension from a defined benefit fund, plus $620,000 cash, (b) $32,362 as a half pension and $946,810 in cash, (c) $1,459,798 cash only. The full pension is "safe" from market fluctuations but evaporates when we both die. Option (b) gives us $326,000 more cash and, if returning 5 per cent, drops our income only by $2172 a year over option (a). What do you suggest we do? We intend to live on about $80,000 per year after age 60 and have one chance to get this decision right. P.R.
At age 60, you are relatively young. If you are both healthy and likely to fall into that 50 per cent of the population which lives longer than the average life expectancy, then you are likely to require a high income for many decades to come.
Thus I would be tempted to take the full pension. It is far more generous than you could get by putting the same $840,000 or so into a publicly available, reversionary, lifetime annuity. Just make sure it is fully funded ie. the money is in the fund and not due to be paid out of the income that some private sector company is expecting to earn over coming decades.
If you take the full available pension from your defined benefit fund, you will together still have some $1.04 million cash in your individual accumulation funds. Try to convert as much of this as possible to tax-free component using the standard "withdrawal and recontribution" strategies prior to turning 65.
If you can earn 5 per cent a year on your super investments, that will bring in over $50,000 a year into the funds. The minimum required 4 per cent allocated pensions until age 65 will produce $40,000 which, together with your defined benefit pension means the family will initially be bringing in some $92,000 a year in untaxed super pensions, over half of it indexed and guaranteed for life. You should have a very good retirement.
I have noted numerous questions and answers dealt with by yourself in the Sunday paper regarding the assets test. None has touched on the matter of the position of persons (such as my wife and me) who will lose their age pension after January 1 next year. The Centrelink website currently advises that we will receive a Commonwealth Seniors Health Card and will be exempt from the usual income test requirements indefinitely. Could you express your opinion as to whether the present government will honour this undertaking? J.S.
Given that pollies like to keep their jobs, I'll eat my hat if the promise was not kept.
Centrelink have subsequently confirmed that all pensioners (including those who are currently receiving other than an age pension) will be automatically issued with a Low Income Health Care Card, while pensioners over age pension age will also be automatically issued with a Commonwealth Seniors Health Card.
This means pensioners over age pension age whose pensions are cancelled on January 1, 2017, due to the assets test changes, will automatically receive two concession cards that are not income tested. This is relevant as there are a number of concessions offered by state government and local councils that are available to holders of a Low Income Health Care Card that are not available to holders of the Commonwealth Seniors Health Card, such as energy bills, public transport costs, council rates, healthcare costs, including ambulance, dental and eye care. (My hat is quite indigestible!)
If you have a question for George Cochrane, send it to Sunday Money, PO Box 3001, Tamarama, NSW, 2026. Helplines: Financial Ombudsman, 1300 780 808; Centrelink pensions, 13 23 00.