PROPERTY investments can provide a great source of retirement income for many but there are plenty of potential pitfalls on the money front. Maximising pension income and minimising tax payments are the key aims for pre-retirees and it’s wise to plan early to take advantage of the complex and confusing rules.
Pension-wise, if you have one or more investment properties the chances are you’re going to get a reduced pension or nothing at all. Centrelink’s age pension income test lets a couple earn just $256 a fortnight from all income sources before the pension starts to get reduced while its assets test is even tougher on property investors.
For a homeowner couple, pension payments start being reduced if their assets – not including their home but including everything else such as shares and investment properties – exceed $258,000.
Pension payments stop completely once assets exceed $991,000.
One strategy used to maximise pension payments involves switching assets or cash into the super fund of the younger partner if they are under age 65. Super assets don’t count towards pension asset and income tests until a person reaches retirement age but this strategy can open up a separate can of worms with capital gains tax.
If you’re a serious property investor, you shouldn’t have to be serious about getting an age pension in retirement, which is really just a safety net that pays about $500 a week to a couple. Tax is the main area where good planning can be beneficial.
I’ve previously written about owning residential property within a self-managed super fund, where you can pay zero tax on income, and importantly zero tax on capital gains, once your super moves to the pensionpaying phase when you retire. This has potentially massive benefits. Imagine not having to pay capital gains tax on a property you hold for 15 years on which you make a $500,000 profit.
However, self-managed funds are a complex area and you need to make sure you get good independent advice. You also cannot transfer an existing property you own into a self-managed super fund.
There are simpler ways pre-retirees can get some tax benefits. Timing is important when locking in gains and losses.
If you are selling a property to raise cash for retirement living or to pump into super, look at offsetting a potential capital gains tax bill with things such as pre-paying interest on other investment loans, booking capital losses on any poor-performing investments such as shares, or making tax-deductible contributions to super (but beware of the heavy penalties if you contribute too much).
Once again, good advice is critical. Anthony Keane is editor of Your Money, which appears in every Monday.
THE FUTURE: Crows coach Neil Craig’s investment property in Halifax St, Adelaide.