The start of a new financial year is a great time to review strategies and settings in order to maximise your retirement income
This week we look at three ‘big dollar’ decisions – and why knowing the detail and/or seeking advice can save you more in the long run.
Some mistakes are fixable. Others aren’t.
This week we let the numbers do the talking, sharing three potential retirement funding mistakes, and how knowing the rules allows you to consider all outcomes before committing.
Paying down the mortgage
Did David move too quickly?
David is a homeowner and on a part Age Pension. He decides to move $80,000 from his super fund to pay down his mortgage. His super fund has achieved 7-8% returns over the past 10 years. In effect, he is moving money potentially earning more to save less (the current interest on his mortgage is 4.5%). However his assessable assets have decreased from $580,000 to $500,000 so he will get more Age Pension.
Simple sums:
Before paying off mortgage
Assets – Super 580,000 & home contents and car $15,000 = $595,000
Pension entitlement $43 per fortnight or $1,111 per annum.
After paying off mortgage
Assets – Super 500,000 & home contents and car $15,000 = $515,000
Pension entitlement $283 per fortnight or $7,348 per annum
Benefits of paying off mortgage
Satisfaction of paying off debt
Interest savings – say 4.5% x $80k
Extra pension – say $6,200 per annum
Is David better off?
David has gained more in Age Pension entitlements and saved interest on his mortgage. This is likely to outweigh the potential for higher earnings on the $80,000 that is no longer in his super.
But an important consideration is that, by closing his mortgage facility, he has lost the flexibility of his redraw facility. Let’s say David needs to fund an expensive operation with little warning. He will now need to withdraw more funds from his super, as this is his only savings. He cannot use his mortgage redraw facility as this account is closed. He is not working so he is unlikely to be approved for such a loan facility again.
Overall his net income is likely to be a little bit higher but he has lost a little bit of flexibility. There isn’t a one size fits all solution as everyone’s priorities and levels of financial comfort with risk and flexibility are different, so it is important to seek advice and think hard before making major decisions like this. And to check all terms and conditions. David may have been able to get most of the benefits (extra pension and low mortgage) but kept his equity access loan open by paying down $70,000 of the debt, rather than the full amount.
When joint assets matter
Tim and Belinda:
Tim (68) and Belinda (61) wish to renovate their home, which they estimate will cost them close to $65,000. They are wondering which funds to use. Tim is on a part Age Pension. Belinda is no longer working, but her super is still in an accumulation account. Their joint assets are used to test Tim’s eligibility. That is, with the exception of Belinda’s super. This means that they have a relatively large asset in addition to their home that isn’t included in the assets test. Rather than take money out of Belinda’s super to pay for the renovation they choose to revamp their home using an assessable asset. Tim thought he might use his own super savings to pay for the renovation, but again, his fund has performed well over the last 10 years. What is not performing well is their cash account, which, as a joint asset, is part of Tim’s Centrelink assessment. By using these funds, they are using money which is currently only earning about 2% per annum. And Jim’s Age Pension payment has increased by $97.50 a fortnight.
Simple sums
Before renovation: Combined assessable assets $800,000
After renovation: Combined assessable assets $735,000 (but their house, which is not assessable, is now worth more).
And Tim’s Age Pension payment has increased by nearly $100 every fortnight.
When emotion clouds your judgement
Prisha’s asset valuations:
Prisha has lived in her home for 25 years, the past 10 alone since her husband died. Her home is her pride and joy and she has kept it well maintained, with very stylish décor. When filling in her Age Pension application, she considered the value of the advice she had sought from interior designers and the luxurious fittings and soft furnishing she has used. So she has valued her home contents at the rate at which she believes she might need to pay to replicate this decor. The value she put on her application was $120,000. And this has tipped her assets over the limit for a single homeowner ($609,250). But Centrelink does not require this type of excessive valuation for home contents. This should be based upon the value you would receive for these items in a garage sale. Prisha has let her judgment be clouded by emotional attachment to her books and lamps and sofa. And this has made the difference between a regular Age Pension payment, as well as the Pension Concession Card, and getting nothing at all.
Simple sums
Prisha’s valuation:
Assets $711,000
Income $6500
Pension outcome – NIL
Realistic valuation
Assets $601,000
Income $6500
Pension outcome $53 per fortnight plus supplements, which in Prisha’s case is $39.10. In total she gets an additional $92.10 a fortnight plus the Pension Concession Card
As you can see, there is always more than one way to skin a cat – or to make adjustments to your assets in retirement. Only you can judge which option works best for your financial wellbeing as well as your peace of mind.
If you would like to check different ways of assessing your own entitlements, use our Age Pension Eligibility Calculator is a private and secure way of knowing how different scenarios might deliver better outcomes
And speaking one on one in a consultation with one of our experienced advisers allows you to test your strategies with someone who knows all the rules.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
Further to paying down or eliminating your mortgage, I found that with CBA if you pay off your outstanding mortgage balance in full (deliberately or accidentally if you miscalculate), they automatically terminate the loan facility. If you have a line of credit secured by your home, instead of a standard mortgage, you can pay it all off and even go into credit, but the facility remains open. This then gives you the ability to access large sums of emergency money very quickly if needed, without withdrawing from your super. Note that if you withdraw from a pension paying account, you can’t later put that money back into it.
my wife has ms and needs a lot of medicines .we will lose our cshc because i had to sell our rental which put us over the threhhold for this year even though the investment return will still make us low earners
Is there any way we can keep the cshc we are in our 80.s
Hi Kevin, thank you for clarifying your situation. With the CSHC the eligibility criteria is simple but also steadfast. To stay on the card you must continue to earn less than the yearly threshold which for a couple is currently $92,416.