Having a well-diversified investment portfolio that includes property is something most Aussie workers aim for in preparation for retirement.
Diversification is, after all, one of the basic tenets of smart personal investment, because it minimises the risk of loss over the long term.
And property is one of the asset classes that Australians tend to favour, if they can afford it.
Almost 40 per cent of workers told a Galaxy Poll conducted for Industry SuperFunds that buying property was the best way to save for retirement.*
The same poll found that 70 per cent workers expected to add to their retirement income, whether by selling their family home or other assets, or by inheriting money.
But using an investment property as your main source of retirement income isn’t necessarily the best investment.
Meanwhile, selling an investment property and adding the proceeds to a super balance isn’t a straightforward procedure, either pre- or post-retirement. (These are issues also worth considering if you inherit a property, as the same conditions apply.)
The Australian Securities and Investments Commission’s Moneysmart site cautions that using an property as your key income generator in retirement is poor diversification.**
If you do intend to offload your investment property, it may be simpler to do so before the age of 65 – the age at which most people retire – because rules about additional super contributions tighten up after that age.
For under-65s, the maximum after-tax contribution to super is capped in any one financial year at $100,000.
However, there’s the ‘bring-forward rule’ that allows you to make up to three years’ worth of maximum contributions – in effect, $300,000 – in one year, as long as your total super balance isn’t above $1.5 million.
But the three-year bring-forward period must to be completed before you turn 65. Using the bring-forward rule over a period in which you turn 65 is more complex, and best navigated with the help of your super fund or an independent financial adviser.
At the age of 65, it becomes somewhat more difficult to inject large sums into your super.
The annual after-tax cap of $100,000 remains in place, but the bring-forward rule is no longer available, and to make any additional super contribution you must also satisfy a work test.
To pass the work test, you must work at least 40 hours over a single 30-day period within the financial year that you’re making contributions to your super. The employment involves any paid endeavour, and can be part-time or full-time, over consecutive days or not.
Once you hit the age of 75, you’re no longer permitted to make additional super contributions, other than by downsizing your family home under the new downsizing rules introduced in the May 2017 Budget.
Under those rules, which have not yet been passed by parliament***, people aged 65-plus who sell their family home will be able to make a contribution of up to $300,000 from the proceeds without breaching the contribution caps, or meeting the work and the maximum super balance tests.****
Any property sale is likely to impact your eligibility for the Age Pension, however. That’s because your pension entitlement is based on the value of both your assets and your income.
Moneysmart explains that the family home and up to 2 hectares of property around it are exempt from the Age Pension asset test. And if you sell your home, the proceeds of the sale are exempt from the assets test for up to 12 months, as long as you intend to use the money to buy another home. But the proceeds will be deemed under the income test.*****
An investment property and the income you receive from it will be assessed under the Age Pension tests, as will any increase in your retirement income as a result of placing the proceeds of a property sale into super. This is the case even if the proceeds are being put into super under the new downsizing rules.
If you’re comfortable with the income generated from your super and unconcerned about receiving the pension, though, the extra cash from an investment property can come in handy.
For example, modelling by Industry SuperFunds shows that a couple with a combined super balance of $800,000, and an investment property worth $500,000, can generate a very healthy average annual combined income of $69,000 from their two assets, including an average of $43,000 annually from their super.******
Australia’s rocketing property prices mean that the asset class is unlikely to become less popular as a retirement-saving tool.
But understanding the interplay between property, super and the pension are vital to ensuring you get the best result from your investment – which makes speaking to an adviser from your super fund manager or to an independent financial advisor particularly important.
You can contact your fund manager to learn the first steps you should take toward making the most of your hard-earned assets.
Have you thought about selling your family home to boost your retirement income?