Nick Bruining Q+A: Shifting assets can help you meet thresholds and get yourself a bigger Centrelink pension

Question

I turn 67 next month, and in anticipation of my birthday I have applied for the age pension.

My calculations show I should receive a part-pension.

I also have a car loan that cannot be offset against the value of the car in my assets.

The interest charge on the car loan is zero per cent with a balloon payment at the end.

Should I draw down some superannuation and pay out the loan, or let the remaining 18 months of payments continue?

Answer

The key to your question is the fact you estimate you will qualify for a part-age pension.

While you have not indicated whether this calculation is based on the income test or the asset means test, we will assume it is the latter.

First, make sure you are using realistic values for your assessable assets. This includes the value of your financial investments plus your “fixed” assets. If you are a homeowner, the value of your home is specifically exempt providing it sits on a land area of 2ha or less.

With respect to fixed assets, generally the scrap value of your personal effects and contents will be somewhere between $5000 and $10,000. Similarly, use the private sale value of your car, not the insured value. You can use sites like carsales.com.au to obtain an estimate.

If your pension is likely to be reduced by the asset test, paying off the loan is likely to result in the best outcome. Each $1000 over the asset test limit reduces your pension by $3 a fortnight.

If we assume the payout of the car loan is $15,000, the car value will not change.

If paid out, the value of your financial assets will decline by $15,000, and once you notify Centrelink, your pension will increase by up to $45 a fortnight.

In effect, that is a 7.8 per cent “return” on the loan payout for life, courtesy of the increased age pension.

Question

I have a very old life insurance policy that was sold to me in the 1990s as a superannuation fund, allowing me to claim a tax deduction for some of the payments over the years.

With my 60th birthday looming, I plan to retire and will then cash in the investment.

Are there any tax or other issues I need to be aware of?

Answer

To cash in the funds, you will still need to satisfy the normal superannuation cashing laws. In this case, turning 60 does not, in itself, allow you to access your super.

The law requires you to have ceased gainful employment since turning 60 to satisfy the release rules. Importantly, this does not need to be your main job, and can be any job.

You may decide to start a part-time job and cease that employment. That would then satisfy the condition of release.

The other option to explore is changing the policy from a “whole-of-life” to an “endowment” policy. The whole-of-life arrangement is more of an insurance product, whereas the endowment version is more of a savings-type arrangement.\

This little-known trick of changing the policy type to endowment essentially shifts the maturity date of the policy from about 95 years of age to a date you can specify. With many older-style policies — providing the maturity date is at least five years from the conversion date — the payout, or cashing in, amount will be significantly higher than the current cash-out value.

If you did alter the policy to an endowment scheme with the minimum five-year term applied, that would coincide with your 65th birthday.

The significance of that is that at 65 you will have reached the general condition of release age for super and you would be able to cash out the money irrespective of your work status now or at that time.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association