Nick Bruining Q+A: I’m recently divorced. Should I use superannuation to buy a rental and rebuild my finances?

Question

I am recently divorced and starting over with very little apart from my superannuation, which currently stands at $700,000.

I’m unsure whether I should leave it where it is, or if it would be wiser to use this to invest in property as a way of rebuilding.

I currently work full-time, have no dependants, and am renting.

Could you please advise on the pros and cons of each option?

Answer

In essence, this is a question about future investment returns and mitigating the risks as much as possible.

At 52, you cannot access your superannuation. You would not meet the requirements for severe financial hardship or a compassionate release of superannuation. That means the only way you could invest in a residential property would be via a self-managed superannuation fund.

Critically, you would not be able to use that property personally in any way, because personal use of an SMSF asset is prohibited.

Further, you may be inadvertently falling into two traps. The first is that past performance is no indicator of future returns. The march to all-time highs in residential property over the past four years has been spectacular, but there are a significant number of one-off macro-economic influences that caused this.

These are unlikely to be repeated, so assuming the increases will continue at the same rate is risky.

The second mistake is to bet all your money on a single asset doing well. This is an extremely risky approach, especially for someone where retirement is no longer a pin-prick on the horizon.

Your super fund invests in a wide spread of assets to reduce the risk of one or more of those assets under-performing.

One strategy worth considering is after the next inevitable market downturn, you take a more aggressive approach with your super, perhaps selecting the high-growth option to take advantage of a recovery.

Question

I ask this question on behalf of a friend who is unwell. He is 61, has recently been discharged from hospital, and is unable to return to work for the next six to 12 months.

He has a small mortgage. All his leave has been used, and now he has no income.

After calling Centrelink for assistance, he was told to use the small amount he has in savings first, before assistance is made available.

What is the best strategy for him to follow?

Answer

I am sorry to hear of your friend’s plight. When a person claims an allowance like JobSeeker, Centrelink applies means tests. But some aspects are very different from the pension means tests.

This includes a special “liquid assets waiting period”. The expectation is that you will use these savings before receiving a payment. The LAWP depends on how much you have in financial assets, including all bank accounts, shares and managed funds. Superannuation-type assets are not included.

For a single person with $5500 or less, no LAWP applies. But someone with $11,500 or more would need to wait 13 weeks. Special hardship provisions might apply. If he has “self-served” a LAWP already, he may be able to receive a benefit immediately.

The second option may be to take some of the savings and reduce the mortgage to the extent that the effect of the LAWP is reduced.

There is no rule that prevents him from using the money to effectively pre-pay mortgage payments. The interest saved would be much greater than the interest earned in a bank account. Equally, his bank might allow him to redraw the extra payments at a later date if required.

Finally, he may be able to access his superannuation by converting some or all of his super into a transition-to-retirement account-based pension.

In any event, he should lodge an application for JobSeeker with a medical certificate as soon as possible to ensure the clock starts ticking. The easiest way will be via the my.gov.au portal. You may need to help him.

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