Thinking about a tree change for retirement?

???My husband 63, is working full time and has a taxable income of about $48,000 a year. I, 46, am working casually as a tutor and earn about $20,000 a year. We have accumulated nearly $300,000 superannuation in my husband's account so far. I don't have super currently because I am self-employed. As my husband's retirement is approaching we are thinking about the next move of our lifestyle. We own a one-bedroom unit - no mortgage - in Randwick, market value of $650,000 plus. Neither of us are confident about how to prepare for our retirement. An option we are thinking about is renting the unit in two years' time and buying a house in the Blue Mountains area where we can commute to the city within a reasonable time. We hope to live in a quiet rural area but quite close to the city: a three-bedroom house where I can use one room as my tuition office. To buy a new property we need to withdraw all the super money and take out a small mortgage. We are not sure if this option is a good one to choose in the future. As far as we know my husband can work part time without affecting his pension and I can do casual work in Sydney as well as at home as it's only a two-hour commute. In addition, we can hopefully expect rental income to pay off strata and mortgage payments. Do you think we are on the right track to prepare for our old age? Do you think it's sensible to use up all the super in order to buy a second property or better to keep some of the super and have a higher mortgage? Do we have a better option to choose to be better off? My husband and I would appreciate any advice you can offer. E.L.

Your husband was presumably born in 1954 and is thus eligible to apply for an age pension at age 66, in three years' time. Even though you are ineligible, the means test would count both your assets and income to determine what a married pension might be and then pay your husband half of that. You, yourself, would be eligible for an age pension at age 67, although government policy is to raise this to 70. You are currently living on about $60,000 a year net of tax.

When you apply for an age pension, Centrelink applies both an assets and an income means test and whichever provides a lower result is the pension granted. Further, once your husband reaches age pension age, then his super benefits would be counted by the means tests.

Let's say you were to rent your Sydney apartment and move to the Blue Mountains. Then the value of the newly rented flat, $650,000, and the rent received, would be counted by Centrelink's means tests. The tests would ignore your new home, and also any home mortgage you would have raised to buy it. (I imagine you would need to borrow at least $250,000 to $350,000 extra to buy even a very small home in the mountains but, frankly, you would be lucky to get a mortgage if your husband is retired and you earn a low income.)

The assets test currently cuts the pension off when assets exceed $830,000. So if we assume his super will have grown to $350,000 in three years' time plus, say $10,000 worth of personal assets and a small car, then the assets test would not allow your husband any age pension.

Estimating your income in such a situation, rent would, if you are lucky, give you a 3.5 per cent gross yield, in which case we can guesstimate you could rent your property for around $450 a week, less, say, $6000 a year in property expenses. This would leave you with somewhere around $335 a week in net income or $17,500 a year. This, together with your $20,000 salary would give the family some $37,500 a year.

From this you would have to pay off the mortgage, which I don't think you could afford.

Let's assume, instead, that you stay in your flat, the assets test would allow a full pension. However, the income test would subject the super benefit to "deeming", which assumes the first $83,400 earns 1.75 per cent and the balance, 3.25 per cent. Let's say his super will have grown to $350,000 in three years' time then, at current rates, this will be deemed to earn some $10,100 a year. This, along with your $20,000 in tutoring fees would allow your husband a pension of about $460 a fortnight, about $12,000 a year, taking the family income to $32,000 which you could top up to, say, $50,000 by taking 6 per cent of the money in super, which is more than the minimum required 4 per cent.

If you are keen to move out of the city, I suggest the best course would be to sell your flat and use the money to buy a new home. If there is any money left over, it can be placed in the bank. But you should take into account the added cost of commuting into the city.

However, it would appear that retirement will result in a significantly lower standard of living and it would be a struggle to meet expenses. One strategy could be to withdraw, say, half of your husband's super and have you contribute it into a super fund in your name. The advantage is that is it then ignored by Centrelink until you reach age pension age, thus increasing his age pension but the disadvantage is that you cannot withdraw it until you reach at least 60 (possibly later if the rules are changed).

You might be better off staying where you are, which would allow you to consider taking up full-time teaching at, say, a local tutoring college, even if it means you have to take some courses in the next couple of years to become eligible, and your husband might consider working longer. If you can significantly increase your income, you could consider moving up to a two-bedroom apartment, although the median price for these appear to be around $300,000 higher in your area.

You recently answered questions from your readers regarding the British pension and you advised that they could claim 8 per cent as a deductible amount. Would this deduction apply to any other overseas pension namely Malta? My wife is in receipt of the Maltese pension, can she claim the 8 per cent deduction? J.S.

The presence of an undeducted purchase price (or UPP) effectively allows your wife to claim a deduction, from Australian tax, for the money that she had previously contributed to an overseas pension fund without claiming a tax deduction.

On its website, the Tax Office lists only five countries for which UPPs are accepted, Austria, Britain, Germany, The Netherlands and Italy. It goes on to advise that, if you received a pension from another country, and believe you are entitled to claim a deductible amount, complete a form, which you can find by either Googling "ATO Form NAT 16543" or its title, "Request for a determination of the deductible amount for UPP of a foreign pension or annuity".

Note that there is also a social security agreement with Malta, the basics of which can be found by netdriving (my own verb!) to www.dss.gov.au and searching for "Malta".

I am 82, my wife is 79. We own our home and are each receiving a Centrelink pension of $450 a fortnight. We have assets of about $470,000, mostly in our combined self-managed super fund (SMSF). My wife is taking an annual pension of $20,000 and I am taking $40,000. Our pension is based on our income, not assets. Is there any way we can increase our pension? Should we close our SMSF and draw money as we require it? S.S.

I presume you have allocated pensions paid out of your SMSF that were started before January 2015.

If so, your pensions are probably being measured in the old, more generous method i.e. Centrelink's income test counts your pension, reduced by a "deductible amount". This latter is determined by dividing the original purchase price by your life expectancies at the time and is generally regarded as being more "pension friendly" than the deeming test applied to later pensions. For example, the income test appears to only be counting income of some $30,000, in round figures. So taking your money out of your SMSF and investing elsewhere is probably not a good idea,

You are currently taking some 12.75 per cent of the assets in the fund, so you can be sure it will run down fairly rapidly, increasing your pension as it reduces in value. Since your minimum pensions are 7 per cent and 6 per cent respectively, you will probably find that taking a smaller super pension would increase your age pension, although your total income would be lower.

You don't mention it but, if your health is poor and you see yourselves moving into an aged care facility in the near future, which would require you to sell your home, you can spend a bit improving its sales value. Otherwise, I don't think you have enough assets to squander on gifts and long holidays.

In a recent column, reader BK wrote listing his and his wife's assets and income which appear to exceed the cut-off figure for obtaining the age pension which Centrelink give as being $2996 per fortnight. How would it be possible for he and his wife to be getting this pension amount of $325 per fortnight (he says for both: he may or may not mean, each)? I am retired, aged 73, my husband is retired also, but not yet of pensionable age. We have defined benefit pensions of about $2500 per fortnight, investments of about $300,000, and own our home. A few years ago I did obtain an aged pension of a very small two-figure amount but when my husband's defined benefit pension rose slightly, this cut out altogether. So you may see that we have a lot less then BK (and others we sometimes read about in your excellent column) yet I do not seem to be able to get the age pension. What opinion and advice do you have for us in this matter? S.W.

Your $300,000 in investments would be deemed to be earning some $8499 a year or $327 a fortnight.

This would be added to your combined $2500 a fortnight in defined benefit pensions which, if they are "unfunded", as most federal government pensions are (i.e. your employer did not "fund" your benefit by putting money aside into a taxed super fund while you worked), then they are fully assessed by Centrelink's income test. My total of $2827 a fortnight is less than the top threshold of $2996.80 at which the age pension cuts off for couples (until March 20 when pensions are again indexed up). The difference could be due to the rounded figures you quoted.

If, instead you are receiving a funded defined benefit pension, then it would have a "deductible amount" that is ignored by the income test. Since these were able to grow quite large under 2007 rules, a rule was introduced from January 1, 2016, allowing a maximum deductible amount of 10 per cent of the pension.

It sounds as though you are receiving the former (unfunded) type rather than the latter, although to complicate matters, many federal government pension are "hybrids" i.e. a mix of both where the employer's contribution is mostly unfunded and the employee's contribution is funded.

Your $65,000 in super pensions, plus say, $10,000 a year from investments, implies you are having a pretty comfortable retirement without the need to worry about a small, part age pension.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00.

This story Thinking about a tree change for retirement? first appeared on The Sydney Morning Herald.