YOUR QUESTIONS

VALUE PROPERTY FOR RETIREMENT

By InvestSMART · 30 Sep 2012

By InvestSMART ·
30 Sep 2012

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VALUE PROPERTY FOR RETIREMENT

I am 60, working full time in a manual occupation and rapidly succumbing to its rigours. Domestically, I support a wife and have an encumbrance-free home. We have a debt-free investment property valued at $500,000, returning $500 a week. We have a professionally managed share portfolio that has vacillated for years and now stands at about $100,000. I have a defined-benefit super fund with $400,000 and an accumulation fund exceeding $50,000. I contribute to my wife's super fund, also a little more than $50,000. I also have a TTR (transition-to-retirement) pension being meted out at $1200 a month from a $180,000 base, which is fed back indirectly into my accumulation fund. Super inputs exceed the $25,000 cap, so I will have to cut back payments from now on. Assuming the above strategy is reasonable, what alterations would you suggest, assuming I will cease work in the next couple of years? Would it be prudent to dispense with the investment property before terminating employment and putting a once-only sum - $450,000 - into super? Is it "fudging" to opt out of the workforce before the three-year term expires? Would it be more beneficial to just retain the investment property to provide income? I won't be pursuing paid work after retirement and don't have enough nous to run an SMSF. B.H.

I don't like the idea of selling a fully paid-off property in a good neighbourhood and in good condition (so it isn't going to cost a fortune to renovate), as I see it basically as a CPI-linked annuity. Also, this is the first time in more than a decade I have seen an urban property earning a 5 per cent rental yield, which, as a rough rule of thumb, is the historical yield achieved when big city houses are not overpriced. Keep it long enough and you won't have to worry about CGT, your children will. Just don't expect much capital gain, if any, for a while.

If your TTR pension is designed purely to be recontributed as a non-concessional contribution to form a tax-free component within the fund, then you might as well take out the maximum 10 per cent allowed for a TTR fund, now that you are 60 and the pension payments are no longer taxed as income. Thus, for a fund with $180,000 as at July 1, you can take out $18,000 in 2012-13.

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.

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Frequently Asked Questions about this Article…

Should I sell my debt-free investment property before I retire and put the proceeds into super?

The article flags both sides. It notes a fully paid property in a good neighbourhood can act like a CPI-linked annuity and that a 5% rental yield is unusually strong for an urban asset — so keeping it for income is a valid option. It doesn’t give a definitive sell-or-keep verdict, but suggests holding can avoid an immediate capital gains event and continue to provide rental income, while selling would free a once-only sum to boost super.

Is a 5% rental yield on an urban property considered a good return for everyday investors?

Yes — the article describes a 5% rental yield as a historically strong yield for big-city houses and says it’s the first time in more than a decade the writer has seen that level. It presents 5% as a rough rule-of-thumb indicator that the property market isn’t overpriced and that the yield is attractive for income-focused investors.

If I hold the property into retirement, do I still need to worry about capital gains tax (CGT)?

The article suggests that by keeping the property you defer any CGT concern — "keep it long enough and you won’t have to worry about CGT, your children will." In other words, selling triggers CGT considerations now, whereas holding pushes that event into the future (and potentially to heirs).

How does a transition-to-retirement (TTR) pension work at age 60 according to the article?

The article notes that at age 60 TTR pension payments are no longer taxed as income. It also explains the TTR fund rules allow withdrawals up to 10% of the account balance each year — for example, a $180,000 balance allows $18,000 of TTR payments in a year such as 2012–13.

Can I use TTR pension payments to recontribute to my super as non-concessional contributions?

Yes — the article points out that if your TTR pension is being used purely to be recontributed as a non-concessional contribution to build a tax-free component within the fund, it can make sense to take the maximum 10% allowed (especially at age 60 when those pension payments aren’t taxed as income).

What does the article say about super contribution caps and my current contributions?

The article states the reader’s super inputs exceed the $25,000 cap and therefore they will need to cut back payments going forward. It highlights the importance of monitoring contributions to avoid breaching caps.

Is it acceptable to stop working before a three‑year period tied to retirement rules (is it 'fudging')?

The article raises the question but does not give a direct ruling on "fudging" or prematurely leaving the workforce. It emphasizes planning around TTR rules (such as the 10% withdrawal limit and tax treatment at age 60) rather than offering a blanket endorsement of leaving early.

Should I set up a self-managed super fund (SMSF) to manage my retirement assets?

The article includes the reader’s own view that they don’t have enough "nous" to run an SMSF. While it doesn’t provide detailed SMSF advice, it implies an SMSF isn’t a good fit if you don’t feel confident managing it yourself — suggesting that using professionally managed super or seeking advice may be more appropriate.