Ask the Expert: Big questions remain even once the mortgage is paid

Question 1

I’ll be 59 soon. Full-time employed, salary $73,061 pre-tax. Super is $223,000, with investment mix as high growth (I changed from balanced as I figured super needed a boost). Home loan is $216,000, at 4.99 per cent, offset account with $135,000, monthly repayments $1420, on track to have fully offset in two years. No other investments.

I’m targeting 67 as retirement age, obviously due to that being age-pension eligibility, and I’m certain I’ll need to avail of the age pension. I plan to not pay off the home loan once it’s fully offset so I can retain access to the cash in the offset account mainly for any emergency, and leave the offset balance matching the loan balance and let the loan pay down by the normal monthly repayments from the offset account.

I’ve calculated the loan will be fully paid off in 13 years, at age 71. Is this a sound plan, or is there something more advantageous I could do?

You have obviously given this some thought and have a plan, therefore you are ahead of many people already. On the surface it looks like a reasonable approach.

A few other things to consider:

• Once you have your loan fully offset in two years, it will be worthwhile reviewing your strategy. Keeping your loan repayments the same may not provide the best tax and investment return outcome. However, retaining an offset account may be appropriate, as many older Australians struggle to get approved for new loans.
• Looking at additional super contributions via salary sacrifice is something that should be considered. Salary sacrifice will save you income tax and, long term, super returns should exceed your home loan rate. As you are nearly 60, you will be able to access some of your super soon.
• The next step in your plan is looking at how much you would like to live off in retirement. This can be a big question. It’s important though, as it will determine many things, including how long you need to work and your savings strategy. You have a target age of 67 but you may want/have to be flexible. Would you consider going part time? Or perhaps that is your preference?

At a high level, you are in a solid financial position and have a workable plan. Next steps would be to drill down further and target a retirement income amount (as opposed to just targeting a lump sum). You can then use an online calculator from your super fund or Moneysmart’s retirement planner to see how you are tracking.

As 60 is one of the trigger ages in super (when you can start to access some funds), I would recommend seeking personal advice at that time.

Question 2

My wife has $500,000 in a super accumulation account. She is 72 and works three days a week and accumulates super through her employment. Should she start a pension account? If so, how much should she deposit?

Most people start a pension from their super only when they need to draw an income from it. However, the other reason is that all earnings within the pension would be tax free. Your super accumulation account pays tax on earnings at 15 per cent (less any fund offsets).

Therefore, a pension account would generally outperform an accumulation account on after-tax returns, if they had the same investments.

But when you are in a pension account, you need to draw down at least some of your funds each year, whether you need them or not. These are shown in the table below.

Therefore, it’s a trade-off how much you move across to a pension if you don’t need the income. As your wife is still employed and receiving employer superannuation guarantee payments, she will need to leave some funds in her accumulation account to keep it open. You should check with the fund what that minimum balance is.

Question 3

If I sell my house for $875,000 and buy a retirement unit for $600,000, will we still be able to be on pension? There are no super funds. Thank you, Richi

Hi Richi,

It sounds like you will have freed up $275,000. This will now be counted under the assets test. However, if that’s all you have, you would still be entitled to a full aged pension.

From July 1, 2025, couples can have the following level of assets and still receive full age pension:

• Homeowners can have up to $481,500
• Non-homeowners can have up to $739,500

If you are single, to receive the full age pension, the figures are:

• Homeowners can have up to $321,500
• Non-homeowners can have up to $579,500

The indexation method was a fair way of calculating CGT as it accounted for inflation while you owned the asset. The discount method is very generous. Some would say too generous.

Craig Sankey is a licensed financial adviser and head of Technical Services and 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.