Making the most of your assets in retirement

Superannuation will become a less attractive option if new tax-free threshold rules take effect, writes George Cochrane.

By InvestSMART · 4 Dec 2011

By InvestSMART ·
4 Dec 2011

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Superannuation will become a less attractive option if new tax-free threshold rules take effect, writes George Cochrane.

MY HUSBAND is 57 and I am 53. My husband has $66,000 in super he lost 15 years of super in a financial crash several years ago and I have $127,000. I have an inheritance of $218,000 invested at 7.63 per cent. We own our home and our business strata title is valued at $200,000. We have a fixed-term deposit of $29,000 and cash in the bank of $18,000. We are in the midst of selling our business for $80,000 and hope to rent the premises for $1500 a month. What is the smartest way for us to combine all our assets to make us an income? How do we make our money work for us until we are old enough to receive any form of pension and/or benefits? L.F.

You have a couple of options. One plan is to not use superannuation. With the proposed huge rise in the effective tax-free threshold the combination of the $6000 general concession plus the low-income tax offset rising from $16,000 to $20,542 a person on July 1, you can have more than $820,000 in joint assets earning 5 per cent and not pay tax.

Instead of a system that encourages Australians to save for the long term, the result will be to make super less attractive, to be used mainly for compulsory contributions or by the very rich.

The one advantage super will retain is the ability to draw a tax-free income after age 60 without having to file a tax return each year.

However, you may find super useful if you have a capital gains tax liability after selling your business because you can use the small business rollover concessions to eliminate the liability. Talk to your accountant.

Alternatively, if you expect income from other sources, you can choose to use the super system. Being over his "preservation age" of 55, your husband can retire and convert all his super benefits to claim a pension from his super fund. It will be taxed until he turns 60 and will also attract a 15 per cent tax offset while subject to the tax-free threshold mentioned.

If your income from your inheritance drops, you can add this to your husband's super as a non-concessional contribution, along with the cash from the sale of the business, noting that you will trigger the three-year "roll-up" cap of $450,000. Remember, too, that when people retire after the age of 55, this triggers a "condition of release" to convert their super to non-preserved status.

However, if they make further contributions later, these become preserved until the person meets a new condition of release, such as retiring again from a new job, or reaching the age of 65.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.

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Frequently Asked Questions about this Article…

How will the proposed rise in the tax-free threshold affect superannuation as a retirement savings option?

The article says the proposed effective rise in the tax-free threshold (the $6,000 general concession plus the low‑income tax offset rising from $16,000 to $20,542) could make superannuation a less attractive place to hold assets for many people. With that change, a couple could have more than about $820,000 in joint assets earning 5% and pay no tax, so some investors may prefer to hold investments outside super. Super still keeps a key advantage: after age 60 you can draw a tax‑free income from super without having to lodge a tax return each year.

Can I use superannuation to reduce capital gains tax when I sell my business?

Yes — the article points out that super can be useful if you face a capital gains tax (CGT) liability after selling a small business because you may be able to use the small business rollover concessions to eliminate the CGT. This is a technical area, so the article recommends talking to your accountant to see if the concessions apply to your situation.

My husband is over preservation age — when can he convert his super to a pension and how is it taxed?

Because your husband is over the preservation age of 55 (the example in the article), he can retire and convert his preserved super benefits to a pension. The pension will be taxed until he turns 60 and it will attract a 15% tax offset while being subject to the broader tax‑free threshold rules discussed. After age 60, income drawn from a taxed super pension is tax‑free and you don’t have to file a tax return for that income.

If I have a lump sum inheritance, should I put it into super or keep it invested outside super for retirement income?

The article offers two main options: keep and invest the inheritance outside super (which may be tax‑efficient given the higher tax‑free threshold) or add it to super as a non‑concessional contribution if you need the CGT or pension‑related advantages. One caveat is the three‑year 'roll‑up' cap on non‑concessional contributions (see next question). The right choice depends on your expected other income, tax position and retirement plans, so consider getting tailored tax or financial advice.

What is the three‑year 'roll‑up' cap for non‑concessional contributions and how could it affect adding my inheritance to super?

The article notes a three‑year 'roll‑up' cap of $450,000 on non‑concessional (after‑tax) contributions. If you add your inheritance and sale proceeds to a spouse’s super as non‑concessional contributions, you may trigger this cap. That can be a powerful way to top up super but must be managed carefully to avoid breaching contribution limits — speak to your accountant or financial adviser before acting.

What does 'condition of release' mean and how does it affect preserved and non‑preserved super benefits?

A 'condition of release' is an event that lets you access or convert your super. The article explains that retiring after age 55 is a condition of release that allows you to convert preserved benefits to non‑preserved status. However, any later contributions may be preserved again until you meet a new condition of release (for example, retiring again from a new job or reaching age 65).

How can everyday investors combine assets (inheritance, cash, fixed deposits, property sale income) to generate retirement income?

Based on the article’s example, you can take a few complementary approaches: keep some cash and fixed‑term deposits for liquidity, invest lump‑sum inheritance funds to generate ongoing income (the example shows an inheritance earning 7.63%), rent out business premises for rental income (the example cites $1,500/month), and decide whether to use super for tax‑efficient pension benefits or for rolling over CGT from a business sale. Which mix is best depends on your ages, income sources and tax situation — get personalised advice from an accountant or financial planner.

Where can I get more help or ask questions about personal investment and superannuation?

The article suggests sending questions to George Cochrane’s Personal Investment (PO Box 3001, Tamarama NSW 2026). It also lists helplines: Banking Ombudsman 1300 780 808 and pensions enquiries 13 23 00. For tax or CGT issues related to business sales and super, the article recommends consulting your accountant.