The pitfalls of owning property

MY WIFE and I are self-funded retirees. I am 84 and have a DIY allocated pension. It includes an old rented house and about $15,000 worth of shares. I now have to sell the house to enable me to pay myself the pension. I work (as a hobby, though very seriously) for at least 30 hours a week managing four family portfolios of shares and investments. I do not pay myself a salary. A friend told me that I could deposit or commute up to $150,000 a year to the pension providing I worked 20 hours a week. Is it possible to deposit or commute funds from my portfolio income and investments to my allocated pension, to enable me to renovate our old rented house to get a better price? The renovation could cost $50,000. Hopefully self-funded retirees over 80 years have a few privileges as well as the senior card. M.T.

I think you will have to restrict your renovations to the $15,000 already in the fund or simply sell the house unrenovated. It's a good lesson in why a relatively small SMSF should not buy a property that ties up most of the money in the fund. Or if you do, you need to plan five to 10 years ahead.

Under the rules, over 65s can contribute to a super fund up to age 74, providing they meet the work test of 40 hours in 30 days, which rules you out. However, even if you were younger, the ATO does not accept that running a private portfolio meets the work test, which requires a person to be gainfully employed unpaid work does not meet that definition.

I would take issue with the comment that self-funded retirees "hopefully ... have a few privileges". Your superannuation income is tax-free, which means that this income escapes the Medicare levy when, in fact, people in this age group are among the heaviest users of medical services. The Commonwealth Seniors Health Card provides pharmaceutical benefits to those earning below a generous threshold for couples of $80,000 a year of taxable income, which therefore excludes non-taxable superannuation income. The cost to taxpayers is a reason why super should be seen as a means of supporting Australians in their retirement and not as a low-tax means of transferring family assets to the next generation.

The right fund for super

I AM about to retire and I need to sell my shares to put into my super. Should I sell now or wait for the price to improve? I am disappointed with my super's performance. Could you give me the name of the better performing ones? A.K.

You need to think your plans through a little more deeply. First of all, if you enjoy your share portfolio and have long-term experience running it, consider running a portfolio within a self-managed super fund. If you have acquired a good selection of shares and want to keep them, you can transfer them "in-specie" into a new SMSF, though there is still CGT to consider. You'll need to make a decision within a few months as Assistant Treasurer Bill Shorten has published draft proposals to ban in-specie transfers.

If you decide against this and wish to sell up and contribute the cash to a public-offer super fund, then you need to understand that super is not a specific investment portfolio. It is simply a tax shelter within which you can buy most investments that you find outside of super.

You need to ask yourself, "What sort of investment do I want? Will it be in a single balanced fund or in a mix of funds?" Then look up superratings.com.au and check out the top 10 funds in each of your chosen categories.

However, history shows that the top performer this year is unlikely to be on top next year. So if you prefer a specific fund manager then look up their website and check their performance. You might do best of all by seeking professional advice.

Future-proofing your retirement

I am 50 and my partner is nine years older than me. I would like to retire early at 56. He has more than $1 million in his super and I aim to be as financially independent as possible. I HAVE $220,000 in my super and I maximise my concessional contributions. My annual salary is $80,000. My other investments include shares and cash of $70,000 and a rental property worth $500,000 with a very modest mortgage. I plan to sell this property in two years and contribute half of the proceeds to buying our new home. I hope to save an additional $5000 to $9000 a year over the next six years. Would my best strategy be to make additional after-tax contributions to my super? Or could I maximise my wealth in retirement with other types of investment? L.P.

If you are going to invest after-tax money for the long term, you are better off investing within the tax shelter that super provides.

Some other points. Is it possible to sell your rental property after you retire, so as to minimise the capital gains tax? Also, when buying a new home, if you are in a position where you both have previous relationships and children (you may not but this is simply a generalised assumption), then you can protect your future by ensuring the house is in joint names and you are not registered as joint tenants, even if you put in unequal amounts.

In the case of a joint tenancy, your partner, who has a life expectancy some 12-13 years lower than yours, could be pressured to leave his share to your stepchildren who could then create problems for you. In the case of joint ownership, the house is not covered by his will but automatically goes 100 per cent to you.

Finally, if you enjoy your work then consider whether you do want to have a simultaneous retirement. It is not uncommon for one retiring spouse to pressure the other to retire when, in fact, the latter enjoys their work and would only consider retiring to maintain harmony. In such a case, a younger wife might find retirement frustrating and unsatisfying.

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.