Take the insurance money and run

MY HUSBAND, who is 77, has had two whole-of-life insurance plans with AMP for 43 years and is thinking of cashing in the policies, as he feels he could do something more useful with the money. AMP assures us that the surrender value of these policies will not be subject to tax. Is this information correct? AMP has put us in touch with Australian Policy Traders, who apparently will offer my husband the surrender value plus 1 per cent to 5 per cent. We would appreciate your opinion of this option. P.D.

AMP is correct: the surrender value of a life policy is not taxed when paid out, since the insurance company has been paying 30 per cent tax on its income through the years. Australian Policy Traders has been buying and selling certain Australian life and endowment policies since 1999, its last competitor having left the scene in 2002. If you surrender it to AMP, the policy ceases to exist. If you sell it to APT, the policy remains, with your husband as the life assured (he would no longer pay any premiums; the new owner does this and also collects the payout from AMP on maturity or your husband's death). If you are happy with this and are willing to accept a higher price from APT rather than AMP, then go for it.

To rent or not to rent

A FRIEND earns about $67,000 a year. She salary packages through her employer, which reduces her taxable income. She has a rental property that is leased at $360 a week but she herself rents at $300 a week. Although she is ahead $60 a week when taking into account rent only, would she be better off financially if she continued renting and negatively gearing, rather than living in her property and paying off her own mortgage? If she does return to living in her own property, how does this affect capital gains tax when she sells? C.F.

Your friend is not really $60 ahead. The $360 she receives is taxed; if she is still in the 31.5 per cent tax bracket, then she is earning about $247 after tax from her investment property (and also has other expenses such as rates), while she has to pay her own $300 rent from after-tax income. If she lived in the property for one year, and has moved elsewhere without claiming another property as her principal residence, she can rent her home out for up to six years and still sell it free from capital gains tax. Otherwise, her property becomes liable for CGT from the day she claims another property as her principal residence and this will be levied on a proportional basis. For example, if she lives in it for one year, rents it for seven and sells it, then one-eighth of her capital gain (thus excluding the year she lived in it and the succeeding six years) will be assessable and, after her 50 per cent discount, one-sixteenth will be added to her taxable income that year.

A yearn to earn

MY WIFE and I are over 70 and on a full pension. Now I can earn $124 a week without reduction of pension (40 cents/$1). When the reduction of 50 cents/$1 comes in, will we lose it from the pension? We only own our home and furniture and one car. A.P.

As long as you continue to earn less than $124 a week ($6448 a year), you will continue to receive the full age pension. At present, for every $1 a fortnight that you together earn in excess of this, your pension is reduced by 40 cents a fortnight. From September 20, it will be reduced by 50 cents a fortnight. However, don't forget that under the new Work Bonus, half of your employment earnings up to $250 gross a week will be disregarded from September 20. Also, couples getting the full pension will get a $10.14 increase a week (singles will get $32.49 a week) and you can expect your pension to be indexed at a higher rate than CPI after the new Pensioner and Beneficiary Living Cost Index (PBLCI) is published by the Bureau of Statistics from August 24.

Hold on to your super

MY HUSBAND will be 70 in July. I am 57 and medically retired. My husband receives $382.14 a fortnight in age pension. I receive $762.80 (gross) a fortnight paid as compensation under section 60. Our bank savings are less than $25,000. I have been granted the health care card. Should I take my super out and is there any tax payable if I do? Is there any way I can get even a part disability pension? If I take my money out of super will I lose my health card? E.M.

Compensation payments are not counted under the usual income means test for the disability support pension but act as a direct deduction, reducing the pension on a dollar-for-dollar basis. Your compensation payments of $762 a fortnight are greater than the maximum $407 a fortnight disability support pension you could get and thus no pension is available. If your super is a smallish benefit, with less than $150,000 taxable component, then yes, it will be tax free on withdrawal as a lump sum under age 60. But, as you are under age-pension age, money in a super fund is not counted towards any CentreLink means tests but is counted if taken out. Your health care card is subject to an income test with a maximum income of $1498 a fortnight. It is unlikely you will lose the card but, unless you need it now, you should leave your benefits in super.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300 780 808; pensions 13 28 00.