When should you restructure?
Arguably the most important thing to understand in retirement is your assets.
At one level it’s easy to think that assets are simple things – they’re just the things you own.
But when it comes to managing retirement income, there are layers of complexity attached to the management and structuring of your assets that can make a very real difference to your income possibilities.
There are five key aspects of asset management that are critical to understand in order to ensure you are receiving or earning as much as you possibly can. These are:
- Using assets to maximise entitlements
- Which assets matter more than others?
- When is transferring assets appropriate?
- Is debt repayment the best strategy?
- Are your assets correctly invested?
One of the simplest ways of increasing retirement income can also be one of the most difficult. This is because the strategies to maximise entitlements come with so many complex rules that many retirees are currently underpaid in retirement.
And this does not just apply to those on a full or part Age Pensions. It’s also the case for those who are self-funded, including those who are borderline qualifying for a pension and others unlikely to receive one in the next few years.
Australia’s Age Pension is extremely highly targeted and complex. This means it takes into account a lot of detail concerning your income, assets, financial obligations and monies owed to you. Keeping a close eye on changes to the rules from when you first start to think about retirement will help you know when an application for the Age Pension, an application for a Commonwealth Seniors Health Card, or other forms of assistance will help improve your bottom line.
Have you reviewed your asset values?
How can this help your income?
Assets and their values can change or can often be misreported (in many cases over-reported) as it can be very unclear how to value your different possessions.
What is important is to ensure that all valuations of your assets are up-to-date at all times. Centrelink will not come asking if your personal assets have devalued. But those assets which are listed and relevant to your current entitlements may change in value over time. This is particularly pertinent when it comes to personal assets such as cars, boats, caravans and household contents, as they depreciate. In many cases those who did not qualify for an Age Pension – even a part one – may find that they do qualify over time. And, of course, with this pension entitlement comes the added bonus of the Pension Concession Card. You can check for yourself the impact asset valuation has on your entitlements on our free Age Pension Eligibility Calculator.
Which assets matter more than others?
Some assets matter more than others when you need to free up some cash for special purposes. It’s only by understanding their relative value in the world of retirement income that enables you to make good decisions.
Gary (68) and Elise (61) want to renovate their home, which they estimate will cost them close to $65,000. But they are unsure which funds to use. Gary is on a part Age Pension and has some superannuation. Although Elise is no longer working, her super is still in an accumulation account. They have a joint cash account. Their joint assets (with the exception of Elise’s super) are used to test Gary’s eligibility.
They decided to speak with our financial advisers about the option of using the different assets to pay for the renovation and the impact this could have on Gary’s Age Pension payment. They were surprised to learn that by using Gary’s super they reduced their assessable assets. Using Elise’s super would not have done this. The win was extra Age Pension entitlements for Gary.
Transferring assets between partners
We are often asked if a younger partner’s super count towards the asset test.
If your partner is not yet of pension age, and their super is still in an accumulation account, (i.e. they haven’t started an income stream), then it is not counted in the assets test. This has led to many people asking the following question:
‘If I transfer some of my assets to my younger partner’s super, could I get more favourable treatment in the assets test?’
The answer is usually yes. It is important, however, that you understand the rules (particularly the superannuation rules) and requirements with this approach to ensure that this approach is right for your own particular financial circumstances.
Is debt repayment the best strategy?
One in five of Retirement Essentials members still have a mortgage on their home. Many of them also have money in the bank, super or some other investments. For part-Age Pensioners, this can sometimes be costly. This is because most part-Age Pensioners, and those that aren’t eligible for the Age Pension, are affected by the assets test.
The fewer assessable assets you hold, the higher your pension entitlement will be, possibly up to the maximum pension amount.
So should you pay it off?
Let’s consider the case of Pamela who just missed out on Age Pension qualification – as a single home owner her assets were above the limit. Part of her assets included $145,000 in a term deposit. Until recently, this money was earning interest of just 1.5% per annum. Pamela decided to look at the option of using $100,000 to pay off her mortgage. This had three effects:
- Pamela forewent the $1500 pa interest earned from the term deposit
- But she saved $3250 pa in mortgage interest – her net gain was $1750.
- Most importantly, she then qualified for a modest part-Age Pension ($300 per fortnight, or $7800 per annum, including supplements) and the Pensioners Concession Card, worth an extra $2000-3000 each year.
Pamela’s income is well ahead of where she was before paying off her mortgage. But taking the decision to pay down a mortgage is always a trade-off as you can lose access to the ready cash redraw in your mortgage and the cash bank account.
Are you comfortably invested?
In retirement, looking after our wellbeing is important. This includes our physical and mental wellbeing as well as our financial wellbeing. Financial wellbeing doesn’t necessarily mean having more money. It is more about feeling secure and confident that you are able to cover your expenses whilst living the lifestyle that is comfortable for you both now and in the future.
An important part of that confidence and control comes with understanding more about investments including:
- Knowing yourself (risk tolerance)
- Select your sweet spot (the trade-off point between acceptable risk and reasonable returns)
- Settle back and enjoy the ride
Understanding how you are invested, and making a conscious choice about investment options, gives greater confidence in the future. Such confidence depends upon a clear understanding of your risk tolerance and your longer term income trajectory.
The above scenarios are not intended to provide one-off solutions or strategies to how you should review and restructure your assets. They are intended to raise important questions that will prompt you to explore the options you can use to make sure your assets are working as hard as you do.
If you would like a one-on-one consultation to better understand a how to use your assets most efficiently you can book a consuktation.
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.