Nick Bruining: About to retire? The hacks you need to get yourself a pension (and then ease the CGT blow)

The reality of the new capital gains tax rules is that seniors planning to retire in the next year or so shouldn’t be too stressed.

The impact of the minimum 30 per cent tax starts from July next year. So if you’re only under the new tax rules for a few months, the costs of restructuring your affairs might not be worthwhile compared to a few dollars in tax.

Nonetheless, for those still with a few years to go — and who may have other objectives — understanding how the rules work might fit in with your future plans.

For example, if you are planning on changing homes in retirement, that could also allow you to access an exemption from the minimum 30 per cent impost.

Let’s use a realistic example to expose some of the tricks.

A couple, both aged 63, have a $600,000 investment property with a $400,000 loan secured against their family home, a combined $800,000 in super and a four-bedroom family home.

With the kids now gone, the decision is to ultimately move to something smaller that’s easier to look after and lock-up and leave when they go on holidays. They plan to retire from work in four years, when they both reach the age of 67.

We’ll be really pessimistic and, for simplicity, assume that the value of the investments stays the same over the next four years.

Having reached 67 — and with the negative gearing benefits now gone because they no longer have employment income — they withdraw $400,000 from super tax-free and pay off the investment property loan.

Incredible as it may seem, and even with today’s numbers, they can claim a part-aged pension.

The Centrelink-assessable assets include the value of the investment property at $600,000, the $400,000 remaining in super and we’ll allow an amount of $70,000, which includes bank accounts, contents and the second-hand value of their cars. All up, their assessable assets are $1.07m, which excludes their home.

At this stage, they’re under the age pension asset test cut-off limit of $1.085m. With indexation, that figure increases 15 times between now and their planned retirement date. The limit could easily exceed $1.5m when they retire in June 2031.

By being eligible and claiming a part-age pension, they will be fully exempt from the minimum 30 per cent tax. And they’ll have a part-pension as well.

That doesn’t mean, however, they’ll pay no tax. They will still have to calculate the CGT income, but might also be able to dump money into super as a tax-deductible concessional contribution to reduce the tax.

But wait, there’s more.

If they then sell the family home and use the proceeds to buy a swanky new place, there’s nothing to stop them using the proceeds of the investment property sale, combined with the proceeds from their home sale, to buy an even more expensive home.

Why? Because the family home is specifically exempt from Centrelink means testing.

They will have a decent asset to leave the kids (their new home) and we’ll assume some of the money is put back into super. All up, $700,000 in super and savings and another $30,000 in fixed assets like contents and cars.

Here’s the bottom line.

Total income would be a minimum of about $63,000 indexed for life, tax-free and using low risk investments. That’s using today’s actual figures.

By 2031, that income will most likely be near $70,000 a year. And, there’s nothing to stop them taking more out of their super, tax-free.

Each $10,000 they spend on their travels will instantly increase their fortnightly age pension by $30 a fortnight because of the reduction in assessable assets. Of course, there’s a limit to the largesse of the Federal Government and that will be when the maximum fortnightly age pension is reached.

Other strategies could include giving money to the kids. Five years to the date of gifting, that gift is disregarded by Centrelink. If you’re 62 now, that might conveniently coincide with the age you become eligible for the part pension.

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