Ask Noel

Each week, financial adviser and international best-selling author Noel Whittaker answers your questions. noelwhit@gmail.com.

My nephew has accumulated five different superannuation funds through his work in hospitality. He is incurring total and permanent disability (TPD) insurance each month on each fund. If a person was to have a TPD claim, can they make a claim on all five policies; and why is the person not allowed to elect not to have this TPD money removed from their fund? I note they can elect to opt out.

The legislation makes it mandatory for a default super fund to offer a certain level of life insurance, however it's not mandatory to offer TPD insurance. The employer may be electing to include the TPD insurance as part of the employer plan together with the minimum life insurance cover. Since the life insurance is mandatory, employees are only given the option to opt out.

The question of whether he can claim on more than one policy will depend on the terms within each insurance cover. He would need to make inquiries to find out the position with each of the funds.

A major finding of the Cooper Review into Superannuation was that 80 per cent of employees are "disengaged" with their super. I hope you can convince your nephew to become engaged in his super and amalgamate his numerous funds into one fund to save fees and then make a choice to opt out of TPD insurance if he believes he does not need it. Keep in mind that TPD means "total and permanent".

I have just turned 55, earn $145,000 a year and have $520,000 in my SMSF. I intend working full time until at least 60. I have been told I might be able to generate a net tax benefit by starting to draw a small transition-to-retirement pension and then immediately redeposit the pension amount back into my SMSF. Is this true and how is the net benefit generated?

You are talking about a transition-to-retirement pension that involves increasing the amount you salary sacrifice to super and then compensating for the reduced pay packet by starting to draw a pension from your super fund.

It would be effective for you because salary sacrificed contributions lose 15 per cent while money taken in hand for a person in your tax bracket loses 38.5 per cent. A major benefit is that your fund becomes a tax-free fund once you start to draw a pension and this should enhance the after-tax earnings. Your adviser will be able to do the sums for you, but keep in mind that total concessional contributions from all sources cannot exceed $25,000 a year.

I have a question about withdrawing superannuation funds in the account-based pension of an older partner and transferring it to a younger partner, to help the older partner qualify for the age pension. Is a contribution tax of 15 per cent paid and contribution limits applicable when withdrawn superannuation funds are re-contributed to a partner? If so, wouldn't this be an expensive route to take?

Let's take it step by step - I assume you are trying to build up your partner's superannuation balance at the expense of yours because superannuation held in their name is not counted by Centrelink until they reach pensionable age.

If you have reached 60, you can withdraw funds from your super tax-free.

You can then make a gift of these funds to your partner, who could then contribute them as a non-concessional contribution.

Such contributions are limited to $150,000 a year and there is no entry tax on them.

They can also be withdrawn tax-free.



The explainer

Don't put brakes on borrowing for a car

I recently had an argument with a friend over the best way to buy a car. I had invested $10,000 in a managed fund for 10 years and used the withdrawal amount ($24,000) to buy a second-hand car for cash. She argued that I would have been better off borrowing the money to buy the car and investing the $24,000 elsewhere. Who is right?

I tend to agree with your friend because lump sums, once cashed in, tend not to be replaced. If you had borrowed $24,000 for the car over two years through a personal loan at 9 per cent interest, the total interest payable would be just $2315. Hopefully a portfolio of good managed funds should do better than that over a two-year period. The other disadvantage of cashing in the managed funds is capital gains tax. Based on the figures you have provided, that may be far more than the interest you would pay on a relatively short term such as two years.