Is This SUPERannuation Strategy Really a SUPER Idea?

GOCAT9 on 04/04/2017 - 10:35

I will be 63 in two months and still working. My wife is 61 and retired. I have a $400k mortgage on my home (LVR=62%) with $400k sitting in its offset account. Interest rate is variable at 3.89% currently. With impending significant changes to superannuation from 1 July this year, I have come up with the following strategy:

  1. Using the "3-year bring forward rule", make a non-concessional contribution to my WIFE's superannuation of $540k (her balance=$21k currently). This reduces to $300k after 1 July.
  2. Fund this from the $400k in the home offset account together with $140k sitting in low interest bank accounts (~1.5% - ouch!)
  3. Start an account-based pension for her (minimum pension draw-down must be 4% of balance currently, 5% when she turns 65 etc) to service mortgage payments (currently ~$23k p.a.).

My analysis:

  1. The non-concessional contribution to my wife's superannuation is NOT TAXED.
  2. In pension mode, the earnings in my wife's super account are TAX FREE.
  3. The pension that she will receive will also be TAX FREE (since she is over 60).

So, since many superannuation funds have returned about 8-9% (nett) using a moderate risk profile averaged over the past 5 years (aggressive profile can return much higher, but at much higher risk!) then I am predicted to gain the difference in what the super pension fund makes less the mortgage servicing. In other words, about 9% less 3.89% = 5% TAX FREE.

So in summary, a $540k pension based account, drawing the minimum at 4.3% will provide $23k p.a. (tax free) (to service mortgage commitment of $23k). The balance of the growth in the fund is clear profit (at ~9% growth p.a. = $48.6k - $23k (for mortgage) = $25.6k p.a. tax free) at current interest rates.

EXIT STRATEGY: This strategy (unless I have misunderstood something) should work well for so long as the return from my wife's superannuation pension account EXCEEDS the interest rate to service the mortgage (currently a 5% margin!!). Should this cease to be true at some point, then I can move the pension account back into accumulation phase, take a lump sum and pay out the mortgage!

(Note: this strategy does not provide the only source of retirement income for us and is not available to us once we reach 65.)

That's it folks…any flaws in my strategy you can see?

Financial

Comments

  • chumlee on 04/04/2017 - 10:45
    +26

    Just one flaw.

    Don't know what you are talking about.

  • try2bhelpful on 04/04/2017 - 10:51
    +3

    Get advice from an advisor. Asking for free advice here is probably not your best investment.

    • Hunter80 on 25/04/2017 - 20:36

      What does an advisor know extra????

      No one knows what the market will return in next 1, 2, 3, 4 years.. The only issue with OP's strategy is that market can even take a downturn, and he might even loose money in short-term, a significant amount.
      So the Exit Strategies don't normally work.

      But other than it is up to the OP.

      An advisor will ask you fill a questionnaire, pretend to determine your risk appetite (which you already know in your heart), draft up a Statement of Advice (just to cover his own back side, and continue being in compliance).. CHARGE YOU A MASSIVE FEES, try to take up the commission from your Super fund, likely he will make you change into a Retail fund.

      Go to any Advisor, and if he says just leave your money into your offset account, give me your account details (or just PayPal email), and I will pay you $100.

  • Ash SA on 04/04/2017 - 11:04
    -2

    IMHO, you are missing the benefits of the cash being in offset account. That, in theory, is nullifying the mortgage interest rate. If you move to super annuation + pension strategy that interest rate will come back to bite you.

    And don't forget that the interest rates are bound to go back to the historical average of 7.70% !! Compare your earnings against those levels.

    • GOCAT9 on 04/04/2017 - 11:57

      Yes, but as interest rates go up, so should the return in super accounts to compensate (on average).

      • Cheap Steve on 04/04/2017 - 17:48

        Yeah, nah. Your mortgage rates will go up at a much faster rate than your cash, bond and term deposit rates. The Banks always keep a nice healthy interest margin so the Bank always wins.

  • JetLi on 04/04/2017 - 11:14
    -7

    i wouldnt trust industry super funds to manage my life savings…maybe consider a SMSF.

  • railspider on 04/04/2017 - 11:14

    It looks like you'd be a prime candidate for a TTR Pension strategy, along with your plan to use your wife's pension account.

    Honestly, with those assets, I think you'd be silly not to spend a few hundred dollars and see a (non-aligned independent) financial advisor. They'll save you far more than they cost.

    • GOCAT9 on 04/04/2017 - 12:02
      +1

      Good idea, I have done that. My tax accountant said it is all sound from a tax perspective (under current and legislated law effective from 1 July 2017.)

      Also, from 1 July, investment earnings in TTR pension will start to be taxed- so TTRs will be less attractive soon.

    • Bramey on 04/04/2017 - 12:18
      +2

      With Gocat's strategy it is best not to do a TTR as the earnings will be taxed at 15% as of 1 July 2017 whereas in an normal pension account the earnings will be tax free.

    • ChrisLevo on 04/04/2017 - 12:02
      +4

      I'm 64 and use it for a living.

      Why do you think that older people are not tech-savvy?

      Do you have a technical background at all?

    • GOCAT9 on 04/04/2017 - 12:09
      +6

      I am expecting to be using the Internet, or whatever it's called then when I am 93!!

      I think I am more tech savvy than most teenagers. As proof I consciously don't use Facebook and twitter, but I use most everything else. Does not using Facebook make me a Luddite? I can't stand knowing what people ate for lunch in a restaurant, know when they are going shopping and the "look at me" selfies!!

    • Cheap Steve on 04/04/2017 - 12:22
      +7

      63 year olds BUILT the internet.

      • Steptoe on 04/04/2017 - 12:54
        +2

        And invented SEX

  • AlienC on 04/04/2017 - 12:09
    +2

    So this is what I sound like when I try to talk computer game development stuff to my roommates and grandfather.

  • Cheap Steve on 04/04/2017 - 12:17
    +3

    A great strategy on paper, but the biggest flaw is that you are jumping from the lowest "conservative" risk profile (100% guaranteed return on home loan offset + cash account) to the highest "aggressive" risk profile (super pension with 90%-100% shares is the only way you will get your anticipated return of 9% pa).

    I would make sure I had my wife 100% on board with this strategy as you are going from zero volatility to a capital volatility range of anywhere from + or - 50% (remember the GFC?).

    If your $540k super pension had a market value of $300k in 12 months time and you still have to draw $21.6K a year, how would that be going down with the War Commander?

    • GOCAT9 on 04/04/2017 - 13:19

      I think she would be ok with it because what I didn't mention is that I will be also on a guaranteed indexed $100k pa. tax free pension for life (defined benefit)

      • Kunalk222 on 24/04/2017 - 13:28

        how the hell you managed that…for life $100k pa???

        Let us know so more ozbargainers can follow you…

    • mskeggs on 04/04/2017 - 13:43

      The risk change is the issue.

      Pretend you had closed the mortgage account rather than keeping it open with the offset.
      Would you take a $400k leverage loan to invest in shares via super, assuming you could get the same 4% interest rate? Or would you deem it too risky?

      Also, how long does the mortgage have to run?

  • Cheap Steve on 04/04/2017 - 13:49
    +3

    "since many superannuation funds have returned about 8-9% (nett) using a moderate risk profile averaged over the past 5 years (aggressive profile can return much higher, but at much higher risk!) then I am predicted to gain the difference in what the super pension fund makes less the mortgage servicing. In other words, about 9% less 3.89% = 5% TAX FREE"

    A "moderate" risk profile that has returned 9% pa over the past 5 years would have held around 60% shares (Australian and overseas shares and property trusts) and 40% safe assets (cash, Australian and overseas bonds). As the classic goes "past performance is no guarantee of future performance".

    Investors have been sailing nicely with tailwinds for the past 5 years with the benefit of falling interest rates (good for bonds and property trusts) and good sharemarket returns (I would argue largely because of the poor state of the market 5 years ago).

    IMO it looks like the wind is changing and we could now be sailing into headwinds. Rising interest rates (bad for bonds and property trusts) and weaker sharemarket returns (because of the good state of the market now).

    Any money allocated to "safe assets" (up to 40% in a moderate portfolio) WILL NOT PERFORM BETTER than your offset home loan account (I'm guessing around 4%) over the next 5 years. The current Oz cash rate is 1.5% and a 10 year Oz Bond is around 2.6%. You will be in income loss position from day one with 40% of your money in safe assets (without even considering the potential capital losses on bonds from rising interest rates). This means the other 60% in shares are going to have perform very strongly to get you anywhere 9% over the next 5 years.

    In short, another flaw IMO is you are overestimating the potential future returns. At best you will scrape out about 1-2% extra return with a lot of capital volatility introduced for no good reason.

    • eclaw on 04/04/2017 - 16:55
      +2

      I'll agree with Steve that you'll have to dial down to conservative to make this more realistic. The idea of the market dipping will have big circumstances on the account balance and therefore future returns to fund the mortgage.

      On the other hand, one positive note that I'll like to add which everyone seemed to have overlooked -

      The amount that you can offset will steadily decrease as you continue to repay your mortgage while the pension balance will remain tax free (up to $1.6mil). All things constant, if we assume the return is equal to the offset 3.89%; this should still eek out a slightly better outcome than relying on the offset.

      But this is really just one way of looking at things, at the end of the day offset is guaranteed savings and a conservative profile is an expected return.

      Please speak with your financial advisor

  • pandadude on 05/04/2017 - 14:29
    -2

    I would recommend keeping the cash in the offset account or paying down the loan.

    You have to remember that saving 4% interest is better than earning 4% interest as the ATO will tax you on the 4% interest. This includes superannuation.

    I would recommend speaking to your financial adviser as they need to consider your margin rate of tax, your ability to receive a pension and many other things.
    if your are entitled to a pension your primary residence would not be assessed (within reason) however your super will.

    When speaking to a financial advisers I would recommend reading the disclosure fee documentation. So long the fee is disclosure they are able to charge you anything. I would suggest a fixed fee.

    • mskeggs on 05/04/2017 - 14:47
      +3

      You need to read the question and follow ups again. Almost none of your response applies.

      • GOCAT9 on 06/04/2017 - 09:08

        mskeggs is spot on!!

  • hayythere on 07/04/2017 - 10:21
    +1

    I'm an accountant and work with SMSFs all the time and I think the technical side of your strategy is sound (pension phase, ages, contribution limits, taxation, roll back to accumulation etc).

    I don't know everything so leave 5% - 10% for uncertainty and maybe other facts not mentioned that might impact your strategy.

    Otherwise the main risk is investment performance in the superfund.

    • GOCAT9 on 08/04/2017 - 08:39

      Totally agree!

  • eclaw on 07/04/2017 - 10:46
    +1

    OP can always treat the strategy like an investment profile

    Offset = guaranteed savings (like cash)
    Pension = Potential returns (shares/property etc)

    Nothing stopping OP from going maybe 70% offset and 30% pension or 70% pension 30% offset

    And if you consider the declining benefit of offset as the mortgage reduces in value; you can probably create a slider to determine what proportion of pension vs offset would maximise the tax savings.

    • Hunter80 on 25/04/2017 - 20:39

      Good Advice.
      Thanks for looking after your fellows, and suggesting something extra.

      At the end of the day OP has to do his own due diligence, but have some information and few options does all add up.

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