Jenny and Daniel contacted us with a dilemma recently. They had received a windfall gain due to an unexpected inheritance. Often inheriting money also means a time of great sadness, but in this case they did not actually know the great uncle who had remembered Jenny in his will. They were now wondering where and how to use these funds in a way that would not result in a loss of Jenny’s Age Pension entitlements. Here’s how Retirement Essentials adviser Nicole Bell was able to step Jenny and Daniel through their options and the way each one would affect their overall financial situation. 

Jenny and Daniel’s current situation

Jenny is 67, Daniel is 64 and they are both fully retired. Their financial situation is as follows:

  • They are homeowners with a $99,000 mortgage. 
  • Their combined current assets are $520,000. 
  • Jenny is currently receiving Age Pension entitlements of around $735 per fortnight ($19,110 per annum) which is around $105 per fortnight (or $2730 per annum) less than half of the full Age Pension for a couple.
  •  Daniel is not yet eligible for an Age Pension.
  • Their combined assets of $520,000 exceed the minimum threshold for the Age Pension which is why Jenny only receives a part Age Pension. This means that any increase in assets will have an impact upon their (i.e. Jenny’s) entitlements. 
  • Jenny has inherited $120,000 from her great uncle in the UK.

Will we lose our pension?

They approached Retirement Essentials to discuss the various ways of using this money because they were very concerned about losing a substantial part of their income (the Age Pension entitlement of $19,110 per annum) if their asset status changed too much. They were open to further investing this money in super, investing in the stock market, paying down their mortgage or spending it, perhaps on renovations or a trip to England where Jenny was born. Nicole spent some time with them discussing the effect of each different use for the money, and here’s a summary of the pros and cons of each different strategy.

Effect on current Age Pension entitlementEffect on overall situationOther comments
Put into Jenny’s SuperReduction of $180 per fortnight in Age Pension entitlementsWill need to draw greater amounts from super to meet cash flow shortfall due to Age Pension decrease
Put into Daniel’s SuperNo change – Daniel’s super is exempt for another three years if retained in accumulation phaseWill need to be retained in accumulation, subject to earning tax so need to weigh up the pros v. cons for tax, Age Pension, and cash flow implications.If Jenny and Daniel do put these funds into Daniel’s account and draw more from Jenny’s super, this might result in Daniel ending up with significantly higher balance. So it’s important to ensure estate planning is considered and beneficiary nominations are valid.
Invest in SharesReduction of $180 per fortnight in Age Pension entitlementsCash flow coming from shares might make up some of the impact, but they would need a net income return of 3.9% per annum to be in equivalent cash flow position initially, and greater once Daniel is 67.Will likely require a lot more active involvement in managing the investments compared with placing it in a retail or industry super fund. Taxable at a personal level, this might be good, bad, or neutral depending upon tax position
Pay off mortgageOnly the remaining $21,000 (after the $99,000 is repaid) is assessable, reducing the Age Pension by $32 per fortnight (assuming $21,000 leftover is moved to cash)Reduces spending costs as no longer need to meet mortgage payments, and minimises impact on Age Pension entitlementsAnother consideration here would be missed ‘opportunity costs’ from investment compared with interest rate on home loan. But given the Age Pension benefits in addition to these calculations then the benefits of mortgage repayment generally significantly outweigh not repaying it.
Spend money on renovationsMight have a short term impact until all funds are spent, but no Age Pension impact once inheritance monies have been spent.They have utilised their funds to increase the capital value of their home, but without an impact on cash flowNeed to look at whether they still have the resources they need for a comfortable retirement if they spend this money, given they still have a mortgage to service.
Take an extended break in EuropeThis is a legitimate expense and the cost will decrease assets, so ultimately no Age Pension impactNo increase in assets, so there is no effect on Age Pension, so the overall impact of receiving the inheritance is negligibleWould be a wonderful memory and amazing adventure to have, however once again Jenny and Daniel will need to reflect on whether they will still have the resources they need to be comfortable through retirement

There is no clear cut ‘right’ way to use this unexpected money. That said, there are useful ways to ensure that Jenny and Daniel have considered the ramifications as thoroughly as possible. Using the Retirement Forecaster calculator with Nicole is their next intention, so they can see how far their current super savings will stretch, when combined with current and future Age Pension entitlements as Daniel reaches 67. They are also interested in modelling some ‘best of both worlds’ options, such as using $30,000 for a shorter stay in Europe and maybe reducing their mortgage by about $80,000. The most important thing is for them to discuss and prioritise their joint preferences, making sure they are on the same page as to the best way to use Great Uncle Arthur’s generous bequest. 

Nicole considered quite a few strategies for Jenny and Daniel when working with them. These include the younger spouse strategy and maximising entitlements to help Jenny and Daniel to structure their assets to minimise any inheritance impacts on their benefits. A Retirement Essentials tailored affordable consultation can also support your decision-making when the options are less than clear. 

Do you have any concerns about unexpected financial gains?
We’d love to hear them.

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.