I am 69 and am considering obtaining a reverse mortgage lump sum with a bank and would like to understand the impacts on the age pension tests. As this is effectively me taking on debt, how does Centrelink treat the money? My questions: 1. Is the lump sum considered an asset? 2. Is any interest earned on the lump sum considered as income? 3. If I give part of the lump sum as a present to my son is it considered a gift? 4. If a gift, how does Centrelink deem the gift? As income or assets, or both? I am not interested in the government reverse mortgage scheme. Mine would be privately arranged. F.F.
Reverse mortgages have not proven popular in Australia, possibly because the loan rates are significantly higher than standard variable mortgage rates. In its recent survey, research company Canstar listed only four on offer and their rates are Bankwest 6.2 per cent, CBA 6.37 per cent, Heartland Seniors Finance, Victoria, 6.19 per cent and P&N Bank, WA, 6.24 per cent.
Bankwest allows a loan up to 25 per cent of the property value, the others up to 20 per cent, while Bankwest and P&N only pay lump sums, the other two offering periodic payments. Google the survey results at “Canstar reverse mortgages”.
Under Centrelink rules, if you draw a lump sum from a reverse mortgage, up to $40,000 is exempt from the assets test for up to 90 days but is immediately subject to deeming by the income test until you spend it. You can gift $10,000 to your son before June 30 and another $10,000 in July and still fall within the gifting rules that restrict gifts to a maximum of $10,000 per financial year up to $30,000 over five consecutive years. Excess amounts are counted by both means tests for five years.
If you draw regular payments, they are not counted as income by the income test and, if spent immediately, say, to pay bills, have no affect on your age pension. But if the money builds up in your bank account, it is subject to the means tests.
Centrelink’s Pension Loans scheme (which one can also find on Google) has attracted criticism for being “just for the wealthy”, which I think is a little unfair.
Under the scheme, people who own their own home or investment property, can take out a loan via fortnightly payments to top up an age pension or, in limited cases, no pension, up to the maximum age pension rate, to be repaid when the property is sold. The current rate charged is 5.25 per cent.
The catch lies in the eligibility requirements. Property owners are eligible and only if he, she or their partner is of age pension age (which rises to 65.5 from July 1) and one or both receives a reduced, or zero age or veterans’ pension. The latter case must be due to the effect of one of either the income or the assets test, that is they get a loan if denied an age pension by one means test but not both.
In other words, you are not eligible if you either get the full pension or have too much income AND too many assets to get any pension at all. The latter restriction is obvious in that if someone is too well-off to get a part age pension under either test then the government has no place offering them a taxpayer-subsidised loan.
The former restriction, for the full pensioners, can be justified in that full pensioners are already getting an income stream equal to the maximum fortnightly loan available, without any need to pay anything back. The reverse argument, if you excuse the pun, is that people on a full pension are more likely to need a loan more urgently, although the counter argument is that a homeowner on a full pension is more likely to depend fully on the home as an asset to eventually fund a move into aged care.
I am a 61-year-old woman, single with no dependents. I own my unit and earn $65,000 a year of which I salary sacrifice $2200 per month to superannuation, which I will cease or reduce to $1500 a month after June 30. I have $730,000 in super with three fund managers, which forces me to scrutinise performance. I have some $324,000 in a portfolio of cash, shares and unit trusts. I would like to retire in early 2018 when I will be 62. I plan to carry out some renovations, replace my car and travel overseas once every one or two years. Do I have enough funds to retire? And when I do retire should I convert all (or only part of my super) to pension mode? K.S.
I estimate you are bringing in around $33,700 a year after tax and super contributions. If you retire with current assets and spend about $50,000 on a new (small) car and (minor) renovations, and $10,000 on a trip, you can expect to have around $1 million (and hopefully more) to fund your retirement.
If you are able to receive $33,700 after tax, or with no tax payable, from your portfolio, you will have sufficient for your life expectancy of 25 years plus a further five years if you are healthy, providing you don’t buy a Rolls Royce or go around the world on the Queen Mary more than once.
Since superannuation can provide you with a tax-free income, then I suggest you marshal as much cash as possible, without triggering any capital gains tax liability e.g. by selling shares, and place it into a super fund before June 30. The current maximum untaxed non-concessional contribution of $180,000 falls to $100,000 after June 30.
You can expect to receive income around $10,000 to $15,000 a year from your current non-super portfolio, which means you’ll need to draw a minimum 4 per cent pension from between a third to a half of your current super assets. If you have enjoyed the experience of running your non-super portfolio, have you considered running your own self-managed super fund?
How will the new super rules affect those on high defined benefits, such as retired prime ministers, judges and so on? I.M.
You’ll be pleased to know that “constitutionally protected” super funds are caught under the new rules. For example, concessional contributions to such funds will count towards the concessional contributions cap of $25,000 a year. Although they cannot result in an excess contribution to that fund (and this is true for all “capped defined benefit funds”), they may cause concessional contributions to other funds to breach the cap.
Constitutionally protected funds will also be subject to the $1.6 million “transfer balance cap” that limits the amount that can be used to produce an untaxed pension.
Are you still resenting the successful lawsuit launched by judges to exempt them from the old “surcharge” on super contributions that existed between 1996 and 2005? Now that was truly an act of the elite likely to cause resentment among us lesser folk.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808; pensions, 13 23 00.
This story Administrator ready to work first appeared on Nanjing Night Net.