How to decide which assets to sell when your income falls short

We are a home-owner couple aged 79 and 72 years respectively. Our assets consist of about $280,000 in super income streams, $10,000 in shares, $13,000 cash-out value of my life insurance policy, and $413,000 equity (at Centrelink's assessment) in an investment property, on which we currently owe about $305,000 with an interest-only loan at 4.54 per cent. Currently we draw around $700 weekly from our income stream. Our part pension has dropped to the extent where we are short around $300 a week to meet our current living expenses. In your opinion would we be wiser to sell the investment property and realise the equity, or redraw weekly from the prepaid portion of the loan, which is about $130,000? Another option is to increase the drawings from our super balances. A third option is to sell the shares and cash out my life insurance. K.L.

Looking at the options you present, cashing out a "whole of life" policy usually means walking away with significantly less than if the policy pays out on death. You need to look at the conditions of the policy, many of which require no further contributions after a certain age. If you are healthy and still running in the City to Surf, it may be worthwhile cashing it in rather than waiting decades. If the doctor has said otherwise, then perhaps cashing it in is not such a good idea.

The investment loan is costing you some $13,850 a year in interest. If the property is valued at $718,000 and producing, say, a 3 per cent yield net of outgoings, then it is bringing in $21,540. If so, then your equity of $413,000 is producing net income of some ($21,540-$13,850=) $7690 a year for around a 1.9 per cent yield on your capital. You could do better with a bank or credit union term deposit.

Given that (a) interest rates are seen to be heading up in coming months and years, and (2) the property market is arguably cooling down in Sydney and Melbourne, according to some figures, and will certainly cool down when interest rates rise, then this could be a good time to sell.

However, be sure to estimate what effect this would have on your Centrelink pension as the rent would no longer be counted by the income test but the $413,000 from the sale of the property would be subject to deeming. However, if you can get 3 per cent interest on a two-year term deposit, that should come close to balancing any loss of pension and you would also be able to spend some capital on yourselves, which would affect both means tests.

After the six-monthly indexation to age pensions since September 20, the income test can measure up to a maximum of $77,917 a year before you lose a part age pension.

My wife and I are both over 75, so there's no way we can use non-concessional contributions to avoid or minimise the 17 per cent "death duty" when we fall off the perch. If I understand your comments correctly, the only option is for whichever of us outlasts the other to transfer everything from the SMSF (paying an off-market transfer fee on our shares) to private ownership and revert to paying personal income tax. Am I right? G.R.

Yes, the current philosophy behind super allows tax benefits for people to save money in super funds and then spend it on themselves in retirement. However, if any is left over, the government wants to reclaim some of the tax benefit granted to concessional contributions and fund earnings, which form the "taxable component" in a super fund.

Hence, a 15 per cent tax plus 2 per cent Medicare is levied on the taxable component in any death benefit left to someone other than a "tax dependant", the latter usually a spouse (including de facto partners), child under 18 or anyone financially dependent on the deceased.

As you say, a reasonable strategy is thus for the final survivor to wait as long as possible before withdrawing assets from a super fund. There is no transfer duty on share transfers but be careful of a potential CGT liability.

As I've mentioned before, the ATO's current position is that an SMSF can make a pension payment by an in-specie transfer of shares, providing it is a partial commutation. However, if there is a full commutation and all assets are transferred out, the fund is no longer a pension fund and the benefits commuted are thus subject to the standard 10 per cent CGT within a taxed super fund.

However, you may not eventually have much of a predicament. The most common problem, as we live longer, is that people run out of savings, rather than leave large amounts to adult children, who can spend in an afternoon what it has taken you a lifetime to save.

Regarding last week's reader question about accessing KiwiSaver savings from Australia, while you are right that the long-awaited bilateral agreement has made it possible to move superannuation in either direction, in fact it is not as easy as it seems. An Australian superannuation fund actually has to be registered to do so. Numerous New Zealand funds have registered because of the demand from returning Kiwis. However, apparently very few Australian funds have registered due to lack of demand. Neither of my funds - Media Super and UniSuper - has registered to offer this service. This means that I am not able to access the funds I have in KiwiSaver in New Zealand. As I'm 63 and therefore eligible to access my KiwiSaver funds at 65, it appears I am going to have to take a lump sum, bring it over and deposit it without the tax benefits of a rollover. This seems somewhat discriminatory and a rather unsatisfactory way to handle the whole business. S.G.

You are quite correct. I can locate only one Australian super fund that advertises that it will accept transfers from New Zealand.

That one fund is WA Super, a Perth-based industry fund that was originally established to service WA public servants, much like First State Super in NSW or VisionSuper in Victoria, all of which are now public offer funds (although the latter two don't accept KiwiSaver transfers).

I suspect that local trustees see the software changes required to follow the rules set for local funds as too expensive to implement, namely the NZ transfer is subject to non-concessional contribution rules i.e. up to $100,000 or a maximum of $300,000 if you are able to use the "three-year roll-up" option and, on receipt, it must be treated as a separate component. Also the NZ component cannot be withdrawn until you turn 65.

That said, and seeing as you are approaching 65, one strategy may be to transfer the KiwiSaver benefit into the WA fund. If you are happy with the fund, you can begin a tax-free super pension at 65 or, if your prefer, then withdraw it, but I'm told that, even at age 65, you cannot roll it over into another pension fund that does not accept KiwiSaver benefits. As you say, it is quite unsatisfactory given that some institutions operate super funds in both countries.

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 How to decide which assets to sell when your income falls short first appeared on The Sydney Morning Herald.