CLARITY ON ANNUITIES
My husband and I are 65 and on an age pension. We own our home and cars and have no debt. We have combined income of $38,600 and I will be receiving an inheritance of about $100,000. I have heard annuities are a good option because they don't affect the pension. Can you give me information about these? Is there any other way of investing the money so I can get a reasonable return? J.S.
Your information is incorrect. Annuities are counted by both the income and assets test. Under the income test, term annuities of less than five years are subject to deeming so, for a couple, the first $75,600 is deemed to earn 3 per cent a year and the balance 4.5 per cent. The price of the annuity is counted under the assets test.
Some years ago, money used to buy a lifetime annuity was ignored by the assets test, but that is no longer true for new purchases.
New lifetime annuities are treated by Centrelink in the same way as allocated pensions. The assets test counts the balance in the fund while the income test counts the total income reduced by a "deductible amount". The latter is calculated by dividing the purchase price by your life expectancy at the time. For a joint life annuity, for example, a 65-year-old woman has a statistical life expectancy of 22 years. But don't worry, that is simply an average, which means that 50 per cent of women live longer, depending on their health and how well they picked their parents.
If you want a short-term investment with total capital security outside a super fund, stick to term deposits with banks, building societies and credit unions backed by the government guarantee.
TO FILE OR NOT TO FILE
My father is 85 years old, owns his own home, worth about $900,000, where he lives by himself. He gets an age pension of $573.93 a fortnight and a DVA pension of about $510. He also has about $60,000 in a term deposit, which earns 5.5 per cent, and about $15,000 in a savings bank deposit account earning 2.5 per cent. His total annual earnings would be about $31,857. Do you think he would need to pay tax? L.T.
Recipients of a DVA pension cannot also receive an age pension from Centrelink, so I suspect that what you describe as a $573.93 "age pension" is probably a superannuation pension from his previous employer, possibly a state or federal government or from a private superannuation pension.
A standard DVA service pension is taxable, while a DVA disability pension or invalidity service pension is not. Similarly, a Commonwealth Super Scheme (CSS) pension paid to retired federal public servants is mostly taxable (albeit with a 10 per cent tax offset), while a private or state government pension paid out of a "taxed" fund is not.
So the best-possible scenario, tax-wise, would be if he is receiving a DVA disability/invalidity pension and a tax-free super pension, in which case no tax return is required. The alternative is if he is receiving a DVA service pension and a CSS pension, which are both taxable. Then a tax return would be required.
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.