Keeping your benefits in a capital guaranteed option will guard against losses, writes George Cochrane.
I AM a 63-year-old disability pensioner (single) living on a Centrelink pension, supplemented by an industry fund allocated pension. The balance in my allocated pension fund is approximately $92,000 and I recently switched my investment choice to a capital guaranteed fund which only returns around 4 per cent per annum. (I draw $320 per month from the allocated pension.) If I cashed my pension, I could get about 8 per cent from a bank deposit, but would I lose out on my Centrelink pension? My only other assets are approximately $26,000 in the bank and a house (fully owned). D.H.
I don't think you should withdraw from your pension fund. By keeping your benefits in a capital guaranteed option, you have prevented any further losses due to market falls. Be sufficiently disciplined that, when the market turns (and I know that no one rings a bell and makes an announcement) you should be able to achieve a higher return than in a term deposit by switching back into a diversified or Australian equity fund.
Accrued leave is assessable
I AM 59 and, in July 2007, started to contribute 95 per cent of my wages ($85,000) as a salary sacrifice into my employee superannuation scheme with AMP. At the same time I commenced a transition to a retirement allocated pension. I was advised that because my taxable income for the 2007/2008 tax period will be below $28,000, I would qualify for the government co-contribution scheme. I contributed $1000 in order to receive the full co-contribution of $1500. Recently due to medical reasons I have had to retire from the work force. In my final pay slip my employer added accrued long service and holiday leave into my taxable income which is now over the cut-off limit to qualify for the co-contribution. Has the employer acted correctly in this regard? C.E.
Yes, your employer acted correctly as accrued leave is assessable income in the year you receive it. If you retired due to an invalidity, then tax is capped at 31.5 per cent.
Pay off home before retiring
I AM 60 years old, still working full time, and intend to do so for another eight years. I have very little super ($7000). I partly own an apartment valued at $480,000 on which I still owe $180,000. Should I continue repaying for this apartment, sell later, and make money (hopefully) that way? On the other hand, should I sell and downsize and concentrate on putting as much money as I can in super? L.U.
You should plan to enter retirement with a fully paid-off home and, hopefully, enough money in super to boost your age pension. (Don't forget to register with the Pension Bonus Scheme when you reach your age pension age.) I doubt that you'll be able to pay off the mortgage and also save a reasonable amount in your proposed working life.
While it is fair to say that changing houses at times of lower prices can mean that what you would lose on the lower sale price you might gain on the reduced purchase price, this isn't true when there's a large mortgage. The mortgage is a fixed amount and the higher the price, the greater the number of dollars left over to buy a new home unit. So the objective would be to get as high a price as possible.
You might do best to pay only the interest on the mortgage for a few years, until house prices recover, while salary sacrificing as much as you can into super, then sell and downsize, possibly moving into a retirement village so you won't have to sell and move again.
Allocated fund a necessity
MY HUSBAND (57) and I (56) have a DIY super fund which our accountant set up as an accumulated pension fund. We want to contribute all of my husband's salary to our super scheme and draw a pension from it. Our accountant says we need to set up an allocated pension fund for this. We don't feel like setting up another fund. H.V.
Your accountant is correct. You cannot contribute to a super fund in the pension phase. However, there is nothing to stop your SMSF containing an accumulation and a pension account for each of you. If the investments in each are not segregated from each other, you will need to get an actuarial certificate each year.
Remember that, if taking a pension while under 60, you are taxed on the taxable component, though with a tax offset equal to 15 per cent of the taxable amount. Also, there is no tax advantage in reducing your taxable income below $34,000, the threshold of the 15 per cent/30 per cent tax brackets.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300780808; pensions 132800.