Question 1. Hi Craig, can you explain the differential treatment in the age pension income test between a Lifetime Annuity and a Defined Benefit Lifetime Pension (which I transferred over $300K to purchase from a lump sum fund), and now only receive a 10 per cent ‘discount’, thanks to former minister Morrison effective from 1/1/2016?
Firstly, we’ll deal with your Defined Benefit (DB) lifetime pension.
You are correct in that the rules changed in 2016. Prior to that any ‘tax-free component’ was not counted in the Centrelink income test. From 2016 the tax-free component was capped at 10 per cent regardless if it was higher.
As an example: If you have a fortnightly DB pension of $400 and the tax-free component was say 20 per cent, then only $320 would be assessed by Centrelink. However, from 2016, because of the 10 per cent cap, $360 is now counted.
Also, under the assets test a DB lifetime pension generally has no asset value so it is not counted at all under the asset test.
Now, in relation to a Lifetime Annuity, there are some variations, but so long as the annuity complies with the ‘Capital Access Schedule’ (which limits the amount of capital that can be accessed as a voluntary withdrawal or death benefit, which the provider can advise you on), then it is assessed as follows:
Income test:
- 60 per cent of the income received is counted by Centrelink.
Asset test:
- 60 per cent of purchase price assessable until age 84 (or minimum five years), then
- 30 per cent of purchase price assessable for remainder of life.
Notwithstanding the above rules, generally DB Lifetime pension payment rates are fairly generous. Annuity rates are determined at time of purchase and are influenced by prevailing interest rates at that time.
Question 2. There was a time when the ordinary man could collect his super and place it in a savings account in the knowledge that the interest income generated could provide some sort of acceptable retirement income – but then everything changed.
What bank accounts provide an interest rate greater than the inflation rate? Why should any ordinary worker consider saving their money in a bank …?
You are correct in that you will not find a bank account that provides interest rates above that of inflation. If you can achieve over 3 per cent per annum then you won’t do too much better.
This is important as inflation and tax substantially eat away at your return and future purchasing power.
For example, if you left $100 in a bank account in 2001, unless it has grown to $160 by 2021, you are going backwards, and you would not be able to buy the same amount of goods or items as you did in 2001. I have calculated these figures using the handy RBA inflation calculator.
Therefore, I would suggest you only keep some of your money in bank accounts. Bank accounts are great for easy access to funds, capital guarantee and short-term savings goals.
However, to keep ahead of inflation you would need to look at investing some money for the long term into growth-style assets such as shares, property or infrastructure.
You don’t need to invest in them directly. They can be accessed via managed funds, ETFs or most commonly, via superannuation.
Question 3. Future Capital Gains Tax: I purchased a block of land and built a house on it in 1998. It was always my intent that I would move in one day. In 2006 I moved in and got married. I have been living in that house since and have paid off the mortgage.
My concern is that I built the place in 1998 when it was worth $155,000 – it may now be worth $750K. I may want to move one day and am afraid of how much CGT I may have to pay when I eventually do sell to buy our next home. Is there a way of capping or limiting the CGT? I did want to change the title to both our names but wonder if that might create a CGT event?
Generally, if you move into your investment property and make it your primary residence, when selling it you receive a partial exemption on capital gains tax.
The portion of the capital gain which is taxable is calculated as follows:
Capital gain value x Number of days when house was not the main residence /
Total number of days in ownership period
So, if you have owned the home for 24 years and it has been your main residence for the past 16 years, then only a third of the gain (i.e. eight out of 24 years) would be assessable.
The above is at a high level only and there may be other tax factors in play, and I strongly recommend you obtain personal tax advice on your situation.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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