PROS AND CONS OF SUPER
Your paper recently ran an article on how the government is raiding our nest eggs. My husband and I each have about $142,000 in a public super fund, from which we draw the minimal amount each month to supplement our part-pension. Should we leave our money in superannuation or transfer it to a long-term investment due to the current uncertainty around government policy? Would that affect our pension? The only other taxable current income we have is from Telstra and IGA shares that amounts to about $2000 a year. S.W.
I am generally not in favour of withdrawing from superannuation simply because of a worry that the government is raiding nest eggs. It isnt its just stopping people from adding as much as they might wish to. Also, remember that super pensions are pension friendly in that the return of your capital, known as the deductible amount, is ignored by the income test.
On the other hand, if you took all your money out of super, you probably wouldnt earn enough income to pay tax, so it is a moot point whether you are better off in super or not. Withdrawal may save on fees if you are currently in a public-offer fund with high fees, but if you dont invest wisely, youll lose far more money than you would save by lowering fees. Also, a withdrawal will see your non-super income increase and, when this is added to your taxable age pension income, you may end up having to submit a tax return, which would cost money if you use an accountant.
By the way, I presume that, at present, you do not need to put in a tax return, but I hope you are claiming the unused franking credits that come with your share dividends. If not, download the Tax Offices form NAT 4098, Application for refund of franking credits for individuals 2012. If you havent been doing it for previous years, use another copy of the form for each year and write in the year.
Admittedly, the government and its treasury are taking a one-eyed look at the superannuation system and continually commenting on the taxes on which they are supposedly losing out. However, Id like to see some balancing figures that show how much can be saved in welfare payments (already the largest part of the budget, nearly half as big again as health and education outlays combined) if people are actually encouraged to save for their retirement. That said, there is no doubt that the recent increase in initial tax-free personal income that is, the general concession to $18,200 rising to $19,400 from July 2014 has made low-income earners wonder about the usefulness of superannuation.
To some extent, theres been a bit of smoke and mirrors applied because tax offsets that previously reduced the tax payable by low-income earners have been lessened or eliminated. The effective amount of tax-free income rose from $16,000 a year to $20,542 in 2012-13.
TOO SOON TO RETIRE?
My wife and I are 55, own our house, and are currently not working. We wish to retire and live off our dividends of $33,000 a year, plus cash interest of $18,000, without touching our principal investments. In our self-managed super fund we have $250,000 in shares, $190,000 cash, plus $100,000 in local government super. In non-super we have $430,000 in shares and $180,000 in cash. We also have two units with the Department of Defence worth $340,000, with $90,000 debt, and one house worth $250,000 with a $110,000 interest-only mortgage. Rents pay off debts. As our shares go up in value, do we sell some off, which would then affect our dividend value? We are not sure of the best way to do things. A.N.
You have accumulated some $1.54 million in net assets on which to see you through your retirement. Now, a 55-year-old woman has a statistical life expectancy of some 30 years, but if she is healthy and has good genes, its always best to budget for another five years.
Assuming your portfolio earns an average of 4 per cent a year, it would allow you to begin spending $50,000 a year, indexed annually at 3 per cent, and the money would run out completely after 35 years. At that time, your indexed income would be paying some $136,600 but still buying the same amount of goods as $50,000 does today, assuming inflation also averages 30 per cent a year.
Right now you are assuming that your dividends and cash interest will keep up with inflation and thus allow you not to touch your capital, noting that you may end up requiring $136,600 a year to maintain your current living standards.
If all the money being printed in the US, Europe and Japan results in a surge in inflation, then early retirement may turn out to be unrealistic. To be honest, 55 is a very young age to retire in todays world.
Frequently Asked Questions about this Article…
Should I withdraw my money from superannuation because the government might change policy?
Withdrawing solely because of fear about government policy is generally not recommended. The article notes policy changes tend to limit future contributions rather than ‘raid’ existing balances. Super pensions also have pension-friendly rules (for example, the deductible amount — the return of capital — is ignored by the income test). While withdrawing might save fees if you’re in a high-fee public-offer fund, moving money out exposes you to investment risk and could increase non-super taxable income, possibly forcing you to lodge a tax return and incur accountant fees.
Will taking money out of superannuation affect my age pension entitlements?
It can. Super pension rules are pension-friendly because the deductible amount of a pension is ignored by the income test, which can help preserve age pension eligibility. But if you withdraw and hold money outside super, that increases your assessable non-super income and could affect means-tested pension assessments. The net effect depends on your total income and assets after withdrawal.
Can I save money by withdrawing from a high-fee public-offer super fund?
Possibly, but it’s a trade-off. The article says withdrawing may save on fees if your public-offer fund charges a lot, but if you don’t invest wisely outside super you could lose far more than you save. Consider the investment skills, fees, tax outcomes and the impact on pension assessments before deciding.
I receive share dividends but don’t normally lodge a tax return — can I claim unused franking credits?
Yes. The article advises claiming unused franking credits by using the ATO’s refund form (NAT 4098 ‘Application for refund of franking credits for individuals’). If you’ve missed previous years, use a copy of the form for each year and indicate the year on the form so you can seek refunds of franking credits attached to your dividends.
Is it realistic to retire at 55 living only off dividends and interest without touching my capital?
Retiring at 55 is possible for some, but the article warns it’s a young age to stop working. An example given: with about $1.54 million in net assets and a portfolio return of 4% a year, you could spend roughly $50,000 a year (indexed at 3% inflation) and the money would run out after about 35 years. That scenario assumes dividends and interest keep up with inflation — a risky assumption if inflation spikes.
If my shares rise in value and I sell some to fund retirement, will that reduce my dividend income?
Yes. Selling shares reduces the number of shares you own and therefore usually lowers your dividend income. The article highlights this trade-off: selling some holdings to access cash can reduce ongoing dividend yield, so plan whether you want to generate income from dividends or from selling capital.
What withdrawal rate is shown as sustainable in the article’s retirement example?
The article uses an example assuming a 4% average annual portfolio return and 3% annual inflation. Under those assumptions, you could start with about $50,000 a year in spending (indexed annually at 3%), but that level would deplete the portfolio after around 35 years. This illustrates the importance of realistic return and inflation assumptions when setting a retirement withdrawal rate.
How have recent tax changes affected the attractiveness of superannuation for low‑income earners?
The article notes recent increases to the tax‑free thresholds (for example, the general concession around $18,200 rising to $19,400 from July 2014, and an effective tax‑free amount cited as $20,542 in 2012–13) have made some low‑income earners question the usefulness of super. It also mentions that some tax offsets for low earners have been reduced or removed, which complicates the comparison between saving inside super and relying on higher personal tax‑free thresholds.
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