Use offset to maximise advantage

A mortgage in retirement is not ideal but can be used effectively, writes George Cochrane.

A mortgage in retirement is not ideal but can be used effectively, writes George Cochrane.

I AM 66 and have a defined benefit super fund that pays me an indexed fortnightly pension of $1650, tax-free. I own a small, two-bedroom unit and still owe about $150,000 on it. It is rented at $330 a week. I inherited $150,000 when my mother died five years ago and was advised to park $100,000 in my loan and put the rest into an allocated pension from which I am paid $2000 a year. In five years I have drawn on $20,000 from the parked $100,000. The $50,000 I put into the allocated pension is now down to $46,000. With the US and Europe looking grim, should I take the $46,000 out and put it in a bank term deposit at 6 per cent? A.M.

You don't mention the crucial figure of how much you need to live on. You receive a super pension paying about $43,000 a year, plus a little under $2000 from your allocated pension and a little over $10,000 in rent after outgoings, and you have drawn an average of $4000 a year from your loan account, so you are spending about $69,000.

I think your first step is to estimate how much you want to live on and then see if you can afford it. If you can manage on your portfolio, then consider closing the allocated pension and adding the money to a mortgage-offset account. This will be equivalent to earning about 7.5 per cent after tax, depending on your mortgage rate, and allow a correspondingly higher net rent.

You are unlikely to be paying tax, so swapping tax-free allocated pension income for taxable rent should not alter this.

If you calculate that you cannot live on your income, then you need to consider whether you can afford your mortgaged property. I generally advise it is best to retire without debt.

A portfolio of options

My wife and I (both aged 63) own a share portfolio worth roughly $200,000. I am working part time earning $6000 to $8000 a year. My wife is still working full-time with an annual income of $120,000. She is likely to work until she is 67 or 68. In terms of using the shares for the best advantage from a tax point of view, would it be best to keep the shares and use the dividends to supplement our income when we are both retired and, when we need additional funds, gradually cash in small parcels of shares and pay the CGT on each small parcel? Or sell the share portfolio and contribute the funds to our super accounts? It would seem that this would eliminate CGT payable. I know if I'm going to do this I need to do so before I am 65 as I won't meet the work-hours test after this and won't be able to contribute to super. S.B.

I don't like to sell a well-established share portfolio unless there is good reason. If you have enough in super to live on in retirement, then you may find it useful to keep your share portfolio to finance lump-sum purchases such as cars, home repairs and holidays over the next two or three decades. These would require you to cash in small amounts at a time and thus escape any tax liability, especially given the planned rise in the tax-free general concession from $6000 to $18,000 from July onwards.

Don't forget that a CGT clock still ticks in a pension fund in that, although such a fund pays no tax while the pensioner is alive, tax can become liable as soon as death occurs.

After such an event, argues the Tax Office, the fund immediately becomes a taxable accumulation fund. No tax liability will arise if the pension is reversionary or if the member had previously placed a binding nomination requiring the trustee to continue to pay the pension to a dependant. If neither of these are present, the fund becomes taxable on the death of the member and any shares sold after death are subject to CGT, calculated as usual.

This could prove a long-term trap for DIY fund trustees who believe that, since their pension fund is untaxed, then there is no need to maintain CGT records for asset purchases.

Gift assessment

In reply to a question regarding a couple's retirement plans, you indicated that "gifts from children are not deemed to be income" by Centrelink. Although our situation is quite different from that of the couple posing the original question, this information may be of use to us. However, we would like confirmation of the full details of Centrelink's policy on the matter before proceeding. Could you let us know where we can find this information? G.W.

Google "Social Security Act 1991" and, at, you will find in Volume 1, Part 1.2 (Definitions) Section 8 (8): "The following amounts are not income for the purposes of this Act ... (z) a periodical payment by way of gift or allowance, or a periodical benefit by way of gift or allowance, from a parent, child, brother or sister of the person." (A benefit would be a non-cash gift.) If received from any other source, such as grandparents, cousins, friends and so on, it is assessed by the income test.

Note that this non-assessability of both a lump sum or periodical gift applies only to those receiving pensions. For those receiving Centrelink allowances such as Newstart, one-off gifts are exempt when received from the immediate family members listed above but all others, along with all regular ongoing payments and benefits from any source, are assessed.

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

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