SMALL STEPS FOR SUPER BENEFITS
I plan to retire at 55 in a couple of years and draw from my super fund as well as an income from a share portfolio, investment property and term deposits. I will be in a high tax bracket. Will the income from the share portfolio, investment property and term deposits be taxed differently (that is, at marginal rates) from the income from the super fund? I have no debts. M.K.
At 55, if you start a super pension, the income has the taxable component taxed as income, along with your other income, but with a 15 per cent tax offset. Thus, if you are in the 32.5 per cent tax bracket this year (for an annual income between $37,000 and $80,000), you will in effect pay 17.5 per cent, plus 1.5 per cent Medicare on the taxable portion of your super pension. However, with lump sums withdrawn from super between age 55 (the earliest that super benefits generally become "non-preserved") and 59, the first $175,000 is taxed at a zero rate. This is known as the "low rate cap amount". Accordingly, if you need money from your super to top up your income from other sources and wish to minimise tax, I suggest you withdraw it in small lump sums during the five-year period while planning to keep the cumulative amount less than $175,000. Your super fund will remain taxed at 15 per cent but I assume this will be well below your personal tax rate and you will have more than enough income to live on.
GOOD AND BAD IN RISK-AVERSE
I am a single home owner, just turned 65 and fully retired. I have $400,000 superannuation in the "cash" option, still in the accumulation phase. I also have $40,000 in term deposits. Centrelink assumes an income of $19,196 a year and will pay me an age pension of $8704 a year. Having been badly burnt by the markets in previous years, I am risk-averse and thinking of placing $250,000 into ANZ Progress Saver at a variable rate of 5.26 per cent and moving $150,000 into the pension phase of a capital stable-growth option. This strategy will keep me in a tax-free bracket. I have talked to a few financial advisers who all say they can do better for me, but won't actually say how until I pay a fee of $1500 to $4000. Do you think my strategy is OK? M.O.
ANZ's Progress Saver account gives you an interest rate of 0.01 per cent and a bonus of 5.25 per cent provided you make a single deposit of at least $10 in a month and have no withdrawals or debits in that month. You have one free transaction but a second deposit counts as another transaction, attracting fees if it's not via the internet and eliminating the bonus interest that month. My experience is that Australians like flexibility. This account is fine as long as you understand it and treat it as a variable term deposit that requires a monthly donation. It pays more than any ANZ term deposit, although a handful of competitors' term deposits beat it. I'm not comfortable with the capital stable-growth option in a super or pension fund right now because such funds tend to contain about 20 per cent in equities and 80 per cent in fixed interest. The latter sector has done well in the past year as rates fell but I'm put off by the fact the problem in Europe centres on government bonds, and markets have yet to focus on the amount of debt paper put out by the US government. There is a huge problem in that sector, but when it will hit us and what the effect will be is uncertain. Also, equities are yet to cease falling. See if your pension fund offers a high-paying cash fund or term deposit.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.