‘My mum has inherited $1m but would prefer to keep the pension’

My grandmother has recently passed and my mother stands to inherit a sum of money, about $1 million. My mother has said she does not want to lose her disability pension which I know sounds strange as she would be able to live quite comfortably without relying on government benefits. But unfortunately my mother is not that educated and has been on the pension for most of her life. I have tried to explain to her that she will more than likely lose her pension with the amount of money she stands to inherit. It would be greatly appreciated if you could offer advice of any sort to give us some clarity and direction. Mum has three daughters: myself (47, single, full-time worker, no dependants, no government benefits); Middle sister (46, married, one dependant, on government benefits); and youngest sister (40, single, three dependants, on government benefits). Mum also has eight grandchildren in total. Is it possible for the inheritance to be distributed to others to lessen her asset pool, therefore possibly being able to retain her pension? J.H.

If your grandmother had decided to bequeath her assets to her grandchildren or great grandchildren, then the money would have skipped a generation or two. However, your two sisters might have found they would lose their welfare benefits, depending on their incomes.

Even if she does not want it, under the law your mother is the rightful owner of the assets, which is important if someone were to pipe up and say “No, the money is mine!”

You can explain to your mother that society, in the form of taxpayers like me, have been supporting her for most of her life, which is fair enough, I think society should support poor disabled people. But now that she can support herself with $1 million, the law requires her to do so.

As a long-term pension disability pensioner, its possible she has not been able to buy a home of her own, which she can now consider, or even build a granny flat on one of her daughters’ homes. If the latter, you should talk to Centrelink about their granny flat rules, which allow a certain amount to be used to buy or build the flat and that amount is then exempt from the means tests. If she buys a home or a home unit for herself, the value of this will be exempt from the means tests for the pension.

She could, if she wanted, give all the money away, in which case Centrelink’s means tests would count it for the next five years under the gifting rules and then she could apply again for welfare benefits, presumably the age pension. (The gifting rules allow her to gift up to $10,000 a year up to $30,000 in five years.) But that would mean she could not buy generous birthday and Christmas presents for her children and grandchildren, could not help pay for education where it is needed, or help them financially where they are struggling, all within the gifting rule above.

Your mother has 14 days from receipt of the money to notify Centrelink and if she intends to buy a home, she should also disclose this.

I turn 60 in December and am a retired, single female. I own my apartment, value $900,000 and currently have two super funds – First State Super, accumulation $14,300, pension $164,500. From the latter, I draw $289 a fortnight. My second super fund is a wrap account, current value $352,700, invested in blue chip shares and I draw $2500 a month from this. A $210 fee is paid to an advisor, which I understand is tax deductible. I have $229,600 in shares, outside of super with a total value of $760,000. I know I should combine my super into one account. I have read in your column that you do not like wrap accounts. This is my dilemma. I have spoken to both funds. I have put this decision off for too long. I get mixed messages from both funds. I have a financially independent 25-year-old son. Does FSS take 20 per cent tax on my super when I die, and wrap is tax free? I can’t get a straight answer. My gut feeling tells me to put all into FSS as it is more diversified in our 2017 economic times. I live month to month with bills, always having $500-$1000 sitting on my credit card. I would like to receive fortnightly payments of $1600. I know everything changes when I turn 60. K.H.

You are receiving $37,500 a year or 7.25 per cent of assets from your two super funds, plus about $9000 a year in dividends from your non-super share portfolio. This implies you are netting some $47,000 a year after receiving a rebate of around $500 in unused franking credits, assuming all your super pensions have been taxable, but with a 15 per cent tax offset, and also assuming a 4 per cent fully franked dividend yield.

Once you turn 60, you cease paying tax on your super pensions and your remaining income should fall within the tax-free general concession of $18,200, so you should still not have any tax to pay, based on the above figures, and will also be able to reclaim all your franking credits, taking your total income to around $50,000.

If you were to increase your super pensions to $1600 a fortnight, or $41,600 a year, this amounts to 8 per cent of your super balances. The minimum you must take from a super pension while aged 55 to 64 is 4 per cent, so you would be drawing double the minimum required pension. As I’ve said before, there is usually no right or wrong, only consequences and the outcome here is that your superannuation savings are likely to run out faster.

However. it seems to me that once you turn 60, and cease paying tax, you should be able to meet your needs without increasing your super pensions any further.

Regarding the shares in your wrap account, I like share portfolios more than I dislike wrap accounts, so I would hesitate to close down the share portfolio within your super wrap unless you were to find that your share portfolio within the account is earning less, after all fees, than, say, the First State Super n Shares fund. According to the research firm Superratings, this fund has earned some 17.5 per cent in the 12 months to November 30 and 8.64 per cent a year compound over the past three years, ranking 24th out of 62 and 23rd out of 61 respectively.

If you should fall off your twig and leave any superannuation benefits to your son, he or your estate (depending who receives them first) will pay a tax of 15 per cent plus 2 percent Medicare Levy on the taxable component of your super benefit, whether FSS or super wrap. Remember that your super is composed of a tax-free component (mostly what you may have contributed after tax) and a taxable component, viz. everything else. People over 60 often get these components confused with the fact that they don’t pay tax on any withdrawals after age 60.

To comply with the transfer balance cap, I commuted the excess amount from one of my account-based pensions. I’d like to combine this smaller pension account with a larger pension account. However, I presume that pension accounts still can’t be combined, yet the old route of combining through the accumulation phase, then returning to the pension phase seems closed once the cap has been reached. how can I combine pension funds? T.E.

Just continue as you did before. Presumably, as at June 30, 2017, the benefits in your two pensions resulted in credits totalling $1.6 million allocated to your transfer balance account (or TBA), which is maintained by the Tax Office.

When you commute the two pensions back to the accumulation phase, the ATO will be advised of the commuted amounts.

Lets say that your pensions are still valued at $1.6 million combined, so that after commuting both, your TBA is debited with $1.6 million. You combine the two accumulation accounts and then roll that $1.6 million back into a single pension, thus your TBA is again credited with that amount and all is sweet. You should make a point of estimating how much the unit price differentials will reduce your balances when selling and repurchasing units in your selected funds. It may be more cost effective to stay as you are.

Let’s make a different assumption i.e. that your two pension balances have fallen to, say, $1.59 million. On commutation, your TBA, with its credit from July 1 of $1.6 million is debited with $1.59 million, leaving it with a positive remaining credit balance of $10,000. As a consequence, you can only roll $1.59 million back into your chosen single “retirement phase pension”.

Let’s instead assume your pension amounts have grown since July and together total $1.65 million. By commuting these pensions, your TBA, with its credit of $1.6 million, ends up with a negative balance of $50,000, the result being that you can now roll over $1.65 million back into a retirement phase pension.

My father collects an age pension and owns his home. He lives alone. During the summer, he plans to stay with me to help out with his grandchildren. During that time I was hoping to rent out his coastal home as a holiday rental, managing and collecting the income myself. Is there any risk that this may impact on his age pension? L.N.

Yes, if your father earns income by renting out his home, he will generally need to advise Centrelink of the income received. Generally, amounts of one-off income received e.g. one day’s employment, or a few days, are not taken into account unless they are part of a pattern of income.

However, a few weeks’ rent of a coastal home will presumably result in a fairly large amount of income and thus will be taken into account by the means tests. The gross income can be reduced by deductions such as agent’s fees, repairs, land and water rates for the period. Centrelink usually relies on a tax return to determine the relevant net income but, where a pensioner is not submitting a tax return because his income is too low, Centrelink allows you to deduct one third from the gross amount of rent received to cover those standard deductions.

A single pensioner can earn combined income up to $4264 a year before his age pension begins to reduce and up to $50,456 a year before the pension cuts out altogether.

Another aspect of which you should be aware, when renting out a main residence, it loses its exemption from capital gains tax for the period it is earning income.

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.

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