House equity

Set up a pre-retirement super

Question 1. I’m 64 now and retiring at 67. I have an investment property with a net worth of $300,000. What will be the best option – either keep the property until retirement or sell it now and top up my super?

In making this decision, several factors must be considered.

Cash, taxes and capital gains
Is the property positively or negatively oriented? In other words, does rental income exceed your loan repayments, and if so, would it still do if interest rates increased by a few percentage points.

In retirement, you want positive cash flow, so to replace your salary. In fact, that’s exactly what super is designed for.

If the property isn’t going to provide you with a decent income that exceeds your interest and other property expenses (maintenance etc.) then it may be better off selling, unless you have a specific reason to hold it.

Unless you can earn enough income from your super, there may be a time when the property needs to be sold to fund your retirement lifestyle.

Has the property increased in value since you owned it?

If you have made significant capital gains, you may want to sell it when your other taxable income is low, such as after retirement, to ensure that any capital gains tax is minimized.

Or if you could possibly make pre-tax (concessional) contributions to the super in the same year you sell your property, also to reduce capital gains.

If your super balance is less than $500,000, the amount of concessional contributions you can make increases carryover provisions, but it’s best to seek advice on this.

As you are over 60, and once you start a retirement with your super, there are two very interesting benefits:

  • All fund income is tax-free
  • All income payments and super withdrawals are received tax-free.

Diversification and risk
In super you can choose an investment option or options that you are comfortable with, and usually these options are diversified across many different assets i.e. Australian and international equities, interest fixed assets, cash and possibly alternative style assets such as private equity. , unlisted infrastructure and business real estate.

With a single investment property, your risk and return are more magnified.

If the property is doing really well, you could beat the super yield, but conversely, if the property is experiencing a downturn, a lot of money is tied up in a single investment.

Simplicity level
Some people like to manage property and it is a hobby or retirement pastime.

For others, they have no interest in dealing with tenants and property maintenance and prefer to outsource all investment decisions. This is entirely your personal choice.

General circumstances and objectives
The decision to retain an investment property or place the net proceeds in super should not be made in isolation.

What other financial resources and assets do you have? Is the purpose of the investment to provide retirement income, or to bequeath the property to your children, or for some other purpose?

As you approach retirement and have big financial decisions to make, now may be the perfect time to seek some personalized financial advice.

Question 2. I am 57 years old and I work part-time. I have no debt at all, 425K in super stocks. I hope to retire and tap into my super to live to 60, or buy a house to rent and then retire. Does it make sense? My health is a struggle with my eyesight going.

It will depend on whether you currently own a home and how much income you will need to live on in retirement.

If you don’t currently own a home, having one in retirement provides security and lessens the need to pay rent. Unfortunately, the largest group experiencing poverty are older Australians who rent.

However, if you want more than a basic retirement income, meaning something more than the old age pension, you will need a super to draw on.

It can be helpful to seek personalized advice to guide you through the options.

By the way, regarding your comment about your eyesight, retirees who are permanently blind are exempt from income and asset testing.

Question 3. I am retiring and plan to max out my super balance and withdraw the required 4%. However, I will continue to receive income from other investments which I may wish to put into the superannuation. Can I start withdrawing the 4% while putting other income into the super?

The short answer is yes.

You’ll need a pension income stream/super account to start drawing into your super, and you can keep your existing super accumulation account to make further contributions to the super.

Therefore, you might want to keep, say, $10,000 in your regular accumulation account to keep it open and transfer the rest into an income stream.

With the work test now abolished for after-tax (non-concessional) contributions, you can continue to contribute to the super until age 75, provided your total balance is less than $1.7 million.

Craig Sankey is a Certified Financial Advisor and Head of Technical Services and Advisory Enablement at Industry Fund Services

Disclaimer: The answers provided are of a general nature and although inspired by the questions asked, they have been prepared without taking into account all of your objectives, your financial situation or your needs.

Before relying on any information, please ensure that you consider the relevance of the information to your objectives, financial situation or needs. To the extent permitted by law, no liability for errors or omissions is accepted by IFS and its representatives.

The new daily is owned by Industry Super Holdings