YOUR QUESTIONS

I'm 55 next year and my partner will turn 55 this year. Both of us are permanent part-timers I earn $60,000 a year and my partner $80,000. No kids and no debt. We own our home, plus $70,000 in shares intended for overseas trips when we retire. Our credit card at any given time can owe between $5000 and $10,000, which we pay off as quickly as possible. We live in an inner-city home, valued at $1 million, and intend to stay there for at least the next five years. My defined benefit (DB) super plan is worth $500,000 (Bank A staff super) and my partner's is worth $130,000 (Bank B staff super). Not many planners have really explained the defined benefits plan. For our $3000 cost, all we get is a lovely 20-page booklet with little info in it and a few pages of info we have supplied them. Anyway, we have been advised we can, at age 55, get a part annuity from our DB super while still working. Is this true? We aim to reduce work to two or three days a week when 55 and start to draw on our super. I can get an income of about $30,000 a year from my super and my partner $28,000. What to do? S.D.

It sounds wonderful to be able to draw on your super at 55 and retire young, or at least cut your working hours, but there can be so many negatives down the track I generally advise against it for all but the rich.

To begin with, you are together bringing in about $108,000 after tax and not saving much, from what you disclose, so your living costs seem quite high.

If, as you are considering, you retire on $58,000 a year, then, when you cease part-time work, your living standards will be roughly halved, although there is likely to be some topping up of your benefits when you finally retire.

Remember that until you turn 60, the taxable component of a super pension is taxed as salary, although with a 15 per cent tax offset - so if in the 32.5 per cent tax bracket, you end up paying 17.5 per cent tax.

I generally recommend against transition to retirement (TTR) pensions until turning 60. Instead, let's say you want to retire on 75 per cent of pre-retirement income or $81,000 a year, indexed, which would be a healthy retirement income even though it requires a 25 per cent drop in living standards from your present lifestyle.

Let's further assume you retire when both are aged 60, so the male and female spouses will have life expectancies of 23 and 26 years, respectively. To budget an annual retirement income starting at $81,000, indexed below average inflation at 2 per cent a year for 26 years, implies you would require about $1.55 million in super at retirement, assuming the fund earns 5 per cent and is untaxed. You are less than halfway there. So your priority should not be so much to dip into your superannuation savings now as to boost them as much as possible for as long as possible into the future.

If we base calculations on accumulation funds then, if you each salary sacrifice the maximum $25,000 a year, unindexed (this cap has not been indexed for five years), and if the funds average 5 per cent return a year before tax (4.25 per cent after tax), your combined super savings will reach about $1.43 million in 10 years - at age 65. Not quite enough.

As it is, you are both in DB funds, which means you are guaranteed a multiple of your final average salary at retirement. One big bank, the CBA, notes it has 14 DB divisions, some of which pay a lifetime indexed pension and some a lump sum. Some offer both - but with a guaranteed minimum - and some have an accumulation fund attached, into which you can make additional contributions. You need to find out what your benefits are projected to be if you retire at age 60 or 65 and see if they meet your needs.

At least one bank allows employees to convert their DB funds at 55 to accumulation funds and thus access a TTR allocated pension, which is not a guaranteed-for-life income stream but is, instead, guaranteed to run out if you live long enough.

The UniSuper affair, in which a DB fund has had its benefits slightly reduced, has emphasised that not all such funds are guaranteed by all employers. If the world enters a prolonged period of low investment returns, employers might find ways to reduce defined benefits, although you would hope the big-four banks would be immune.

Ultimately, it is your choice when you retire but taking your super now could result in you scratching by on a low standard of living later in life. Keep working!

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.