Imagine you’re retired with $400,000 in investable assets and you think you need about $24,000 a year on which to live.
These assets are currently in super and you’re wondering what to do with it; should you leave the money there, or take it all and invest in your own name somewhere else?
At the end of last year, Peter Switzer’s The Super Show on 2GB and 3MTR took a call from an investor who had found herself in this situation and had actually decided to take all her money out of super and put it into term deposits.
She wanted to know if she’d done the right thing. She wasn’t terribly happy with her super fund and was concerned her account-based pension would run out of money. She reasoned that since she had a good idea of her expected income – which was being satisfied thanks to current reasonable term deposit rates – she would have greater control of her future spending needs by using term deposits.
Was it a good idea?
There are a lot of pros and cons in owning assets in your own name. For example, one pro is that it’s simple and provides for complete control. Also, where relevant, capital gains tax (CGT) concessions are available, such as a 50% reduction when the asset is held for more than 12 months.
The cost of administering all personally held assets will depend on whether you employ someone to do this for you or you do it yourself.
However, a disadvantage is that time has to be allocated to collate financial information (there are some administration services, sometimes called Wrap Accounts, which will do this for a fee but only for certain types of assets such as widely held managed funds and ASX listed equities). Further, income is taxed at personal income tax rates and there are often limited options to reduce this tax, especially in retirement.
Assets aren’t protected from creditors and can also be subject to Family Court action. Most assets held in your personal name are counted for Age Pension purposes and may therefore limit the potential for accessing social security payments and various associated tax concessions.
Further, from an estate planning perspective, it’s easier for the surviving family to challenge estate plans for assets held in a personal name. This is the case even with a specific will and these situations can be tied up in the courts for years.
Reduced Centrelink payments
From a Centrelink perspective, term deposits held outside of super are not only counted under the assets test but also under the income test. That is, the assets are deemed to earn a certain level of income. For a single person at present, the first $44,600 is deemed to earn 3% per annum and the remainder is deemed to earn 4.5% a year.
For Centrelink purposes, therefore, our caller will have earned $17,331 a year, which is equal to $666.58 per fortnight.
(44,600 x 3% + ([$400,000-$44,600] x 4.5%) = $17,331 ÷ 26 weeks = $666.58)
The net result is that the investor’s Centrelink Pension will be reduced under both the assets test and the income test.
Term deposits in super
What about super? Well, I wonder if our caller has made the classic mistake of thinking super is an investment, just like term deposits, rather than an investment structure where investments are held. It’s possible, subject to your super fund’s trust deed, to invest the fund’s money into a term deposit. This way you can get the security of a term deposit as well as the benefits of superannuation.
What’s more, there are Centrelink advantages in using super, especially from an income test point of view.
The income test
The amount counted under this test is the pension income less an amount called the deductible amount (DA). The DA is calculated as follows for account-based pensions:
Purchase Price ÷ Life Expectancy
The DA is calculated when the pension commences and will not change.
So, if our caller was aged 65 when her account-based pension commenced, she would have a life expectancy of 21.62 years (click here for a guide on life expectancy [1]). The DA would have been $18,518.
($400,000 ÷ 21.62 = $18,518.52)
If her pension paid her $24,000 in income, then only $5,498.61, or $211.48 per fortnight, would be counted in the test.
($24,000 – $18,518.52 = $5,498.61 ÷ 26 weeks = $211.48)
She will, however, have to count the pension assets under the assets test.
Clearly, doing the number crunching and comparing your options are important.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: Is the US economy decoupling from Europe? [2]
- Charlie Aitken: Aussie stock opportunities [3]
- Andrew Bloore: Lump sum or pension? Choose at your peril [4]