Alfred Einstein knew a thing or two. His view on mistakes was simply summed up when he said, ‘The only mistake in life is the lesson not learned’.
We agree. For most of us, it’s not about any poor choices that we may have made, but more about how we respond to them. The best plan, of course, is to learn from the mistakes of others. That was the theme of our July 3 article when our team, including Nicole, Megan, Sharon and Steven, shared what they believed to be the most costly errors when it came to managing superannuation. Who knew what an avalanche of questions this would encourage? So in the spirit of learning, today we are sharing some of the most Frequently Asked Questions (FAQs) and what our trusted advisers said in response.
Should Christine move her super?
‘I have my superannuation with a financial adviser and it is spread across various shares and property trusts. I think that the fees are possibly too high. Should I consider shifting back to an industry fund with lower fees? My super balance is around $250,000.’
‘Hi Christine, thanks for reaching out. It can be tough to know if you are in the best product for you. Low fees aren’t always necessarily better, but over the long term these things can make a difference. The government website, Moneysmart, provides some useful tips on how to go about comparing super funds and what to look out for. It also includes a link to the ATO super comparison tool. You can access the website here. Best of luck!’
Trevor is concerned that super is riskier than cash.
‘Just wondering, if my funds are in a fixed-term bank account, the deposit is guaranteed by the government up to $2500000. In super you are at risk to the stock market which is a lottery.’
Am I correct?
And Steven responds:
‘Hi Trevor, thanks for sharing your thoughts. You are correct in that there is no Government backed guarantee for super funds as there is with most banking institutions. However it should be noted that when investing with super there are options other than just shares if the volatility of share markets is your primary concern. Separately, it is important that you select an investment that suits your risk profile and that you evaluate the returns that different asset classes offer. Here’s a link to a previously published comparison of cash, shares over the long haul. Thinking about likely longevity and how long you want your funds to pay you an income is really important. This is where Retirement Forecasting can help.’
Many people will also benefit from the tax concessions for superannuation both in the accumulation and drawdown phase. Cash in the bank doesn’t enjoy those same concessions. It’s worth looking at a superannuation consultation if you are thinking about your options.
George asks if an inheritance will attract more tax.
‘My wife and I receive the full Age Pension each. My wife is aged 61 and receives the full Age Pension because I receive a Veterans Affairs TPI disability pension. My wife will shortly receive an inheritance of approximately $300,000 from her mother’s estate. She intends to deposit this amount into her current accumulation super account to avoid the assets and income test as we are close to the limit.
I understand that she will be taxed 15% on the annual earnings, but is there tax also payable on the $300,000 deposit into her super account?’
‘Thank you for seeking our guidance. My condolences at the passing of your mother-in-law. What you are suggesting would likely count as a non-concessional contribution that would trigger the Bring-Forward rule which means no, there would be no tax on this deposit. To be certain, your wife should speak with her superannuation fund.’ She could also speak to one of our advisers.
Marcia wants to recontribute but is wary of a penalty.
‘I fear I have made one of these mistakes. Given the talk of global and national recession and having been through the Global Financial Crisis and two recessions already, I moved the majority of my small super savings into a bank savings account where funds are guaranteed. I understand that if I move this money back to super, I will be taxed a further 15 percent contributions tax. And if I leave it in the bank savings account, I’ll be taxed on the interest. Do I have any other options?’
Sharon’s answer is reassuring:
‘Hi Marcia, Yes, this can appear concerning for some people. The good news is that your money doesn’t need to remain in the bank savings account.
Moving the money back into super does not mean that it will need to be taxed a further 15 percent contributions tax. There are several types of superannuation contributions. The one that is taxed at 15% contributions tax is called a ‘concessional’ contribution. There’s also one using after-tax money (e.g. money in a bank account) called a ‘non-concessional’ contribution. The ‘non-concessional’ contributions are not taxed, as they use money which has already been taxed (i.e. they are using after-tax money).
Contribution caps apply to both of these types of super contributions. There are quite a few tips and traps we can go through with you, if you would like to discuss this further in a consultation, to ensure you know whether you comply within the existing rules. We’d love to help you understand your options when you’re ready.’
Was Marie’s property purchase the right strategy?
‘I am 66 years old. My husband will be 76 soon. We have lost lots of money over the years due to bad judgment and (not enough) saving.
We have both withdrawn most of our super savings to buy a home for us to live in. this means that we have no other savings, investments in properties, shares or any other assets.
My husband is still working and receiving a low wage and I work three days per week. We are not receiving any income assistance from our government as yet.
Have we done the right thing in buying a home for us mortgage free and with very little money in our super accounts?’
Sharon reinforces the importance of peace of mind:
‘Hi Marie, first up, you have done well to buy your own home mortgage-free. Everyone’s circumstances are different and we all do the best we can. It sounds like you are both making the best use of the opportunity to earn a little more to increase your nest egg before retiring. It’s hard to say if you’ve done the right thing, but you will know that, if buying your own home provides you peace of mind across your retirement years. It’s not always about money. Peace of mind can be hard to measure. If you are wanting to know how much you can safely spend during your retirement years to avoid running out of money, I would be happy to help using our Retirement Forecaster tool. Depending upon your income, you may also be eligible to receive an Age Pension to supplement your income. We can help you work through both these scenarios in a tailored consultation.’ You can also do a quick check of whether you might be eligible for the Age Pension here.
Will Hon’s income stream be taxed?
Hon asks if he will face a tax penalty by drawing down
‘One of the advantages of converting super into an account based income stream (as often highlighted) is that all the earnings are tax-free when you switch to pension (decumulation) mode. Yes, I wholeheartedly agree with this. But there is a trade-off as the income stream will be considered as income in the eyes of the ATO unless I am wrong.
Assuming I drawdown an income stream of $5000 a month for a reasonable lifestyle, this equals $60,000 per annum which will attract a tax liability of about $9000.
Am I right in saying this?’
Steven thinks this won’t be the case:
‘Hi Hon, thank you for sharing your thoughts. What you have said is not quite correct. Generally speaking the ATO do not count the drawdowns as income and tax them. There are some niche exceptions where some tax may be applied, but for the majority of people they would not pay tax on the draw downs.’
Peter asks if downsizing is a good strategy
Here’s his plan:
‘If a couple with approximately $1m in super were to spend 500,000 to move to a more expensive house, they would then be eligible for almost the full Age Pension of 40,000 a year. That is about 8% on the 500k, plus the appreciation on the more expensive house. You also do not have to worry about the volatility of the stock market or interest rates.
We could quite easily live on 500,000 super and 40,000 a year in combined pension entitlements for 20 years.
Is this a good strategy?’
And Sharon agrees that it’s a great question.
‘There is no straight answer as everyone has differing views on their retirement goals and investment preferences. You are correct in referring to assets used to purchase your house are not counted, as the home you live in is considered an exempt asset for Centrelink purposes. However, there are some pros and cons so it’s not always a good strategy. It can depend on whether you want access to liquid capital, for healthcare or other needs, as your example here ties a lot of capital up in the family home. Unless you plan to sell and move again, this idea might not suit everyone. An advice consultation can help people decide which pathway might be best for their own particular needs.’
And the last word goes to Dominic, who read our article on super mistakes and the subsequent questions and answers.
Thanks to Dominic, and all our other members who contributed such intelligent questions and gave us the opportunity to better understand their current superannuation concerns.
What about you?
Do you still have a burning question? Feel free to share it so we can try to assist your understanding of superannuation.
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.