Mortgage in retirement: To pay out or not to pay?

I am a 65-year old-female, single and looking forward to retiring from my two-day-a-week bookkeeping job, which brings in about $225 a fortnight, within the next 12 months, when I will be eligible for the aged pension. I am hoping to be able to live well into old age in my home, which still has a $200,000 mortgage, with fixed interest at 3.94 per cent a year. I also have $200,000 in a transition to retirement (TTR) pension with SunSuper, which has been earning more than the cost of servicing my mortgage. I put the $16,000 per quarter from my TTR towards the mortgage. Because of the higher earnings on my super, I may be better off leaving my money in the pension fund and draw the minimum to service the loan. With any luck, my pension fund should grow as my mortgage shrinks, at least in the short term. My thinking is that I can always withdraw the money and pay off the mortgage if things start to go in the opposite direction. I will upgrade my car for about $20,000 after retirement, using a separate accumulation fund. What impact will that have on my aged pension? Am I better off paying out the mortgage? I feel as though that would be shooting myself in the foot, and not give me the option of supplementing my aged pension if needed.  T.A.

As a rule of thumb, I prefer that people enter retirement without debt.

Your home mortgage will not increase your age pension while the presence of your $200,000 in super will reduce it.Credit:

You have $200,000 in a TTR pension that could pay off the mortgage and, while the sharemarket was strong between January and April, its been falling over the past few weeks.

If it drops much more, you run the risk of having your super diminish to the point that there is not enough to pay off the mortgage.

I wish you had mentioned how much you have in your second super fund.

Once you turn 66, which, since January 1, has been the age at which people can apply for an age pension, the means tests will ignore the house, and thus the mortgage is ignored.

In other words, your home mortgage will not increase your age pension while the presence of your $200,000 in super will reduce it.

Research shows that a large percentage of people who seek financial advice choose to ignore it, so if you are determined to retain your super pension, remember that a TTR pension has been taxed on its income since July 2017.

Since you are over 65, the TTR pension should have automatically switched over to an untaxed pension “in the retirement phase”. If not, call SunSuper ASAP.

I am a single, non-home owner, self-funded retiree. I am 74 and in good health. My assets (cash and shares) are about $1.1 million. I have a lady friend (we are not living together) and she is a non-homeowner on a full age pension. She is 77 and in good health. I would like to buy a nice villa in a retirement village in both our names; live together as a couple and look after each other in our old age. Of course, Centrelink will assess us as a couple and she could lose her pension. The villa will cost $329,000 plus other expenses, so our assets should be about $770,000 plus an old car and furniture. So, we should be able to get a small part pension. Do you see any pitfalls, or do you have any suggestions?  W.R.

Centrelink considers a retirement village to be a “special residence” subject to “special residence rules,” which determine your homeowner status according to your “entry contribution.”

This latter is the lump sum paid, whether described as a price, or donation or loan, to obtain accommodation in the village (which is not to be confused with a government-funded “aged care residence”, subject to different rules).

I note you have a car. Retirement villages often sell access to a garage under a separate contract.

Usually, the combined amount paid under both contracts is used to calculate the entry contribution.

However, if you can prove the garage is not attached to your unit and thus entry is not conditional on buying a garage, the cost of the garage is not part of the entry contribution and is instead counted as an asset.

Now Centrelink’s “extra allowable amount,” or EAA, is the difference between the pension homeowners' and non-homeowners' assets value limits.

For example, the maximum value at which a homeowning couple lose the pension is $853,000 and, for non-homeowners, $1.06 million. The difference, or EAA, is $207,000.

If your entry contribution is more than $207,000 (which most are), you are considered a homeowning couple. Accordingly, if your remaining assets work out to, say, $790,000, you would be eligible for a couples’ pension of about $189 a fortnight.

My concern would focus on the contract required by the retirement village, as these can impose exit fees and harsh exit conditions i.e. who gets any capital gains, who you can resell to, etc.

Looking down the track, if one of you becomes ill and needs to move to the residential aged care section of the retirement village, while one remains behind, you would need to fork out for an additional lump sum or “Refundable Accommodation Deposit” that could be hundreds of thousands, so investigate that option before committing yourself.

My wife has $400,000 in accumulation mode with First State Super and will retire later this year. Her three options are: 1. Transfer funds to our family self-managed super fund. 2. Remain with FSS and start a retirement pension or 3. Move to an industry fund. My understanding is that, under Labor’s proposed rules, any franking credits would not be paid to a tax-free pension fund. I asked First State Super what they expected to be the effect on their pension funds and was told that, because their investments are pooled, franking credits are applied across all members’ accounts in an equitable manner. Accordingly, there would be no change to the returns that would be achieved by accumulation, TRIS or pension funds. If this is the case, it appears to be totally unfair that Self Managed Super Funds are penalised while retail funds get a “free ride”. What would be your advice on a course of action should Labor's proposal to ban franking credit refunds come to pass. R.B.

Any untaxed super pension fund that is not pooled with a taxed accumulation fund (allowing the latter to use the former’s franking credits) will not be able to claim unused franking credits.

So, the argument that SMSFs alone will see reduced income is incorrect, even though one could argue there are not many of the former types.

I’ve mentioned before that the dividend imputation system was introduced in 1987 in order to eliminate the double taxation of dividends that existed then.

It wasn’t intended to eliminate company tax on revenue paid out as dividends, which is the effect when unused franking credits are paid out.

At least the proposed changes retain dividend imputation, whereas many countries have abandoned it. Of those few that retain an imputation system, only Australia pays out cash – more than $5 billion a year – to refund unused credits.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Australian Financial Complaints Authority, 1800 931 678; Centrelink pensions 13 23 00. All letters answered.

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