Ask the Expert: Reverse mortgages, switching super funds

The government’s reverse mortgage scheme is worth perusing, Craig Sankey says.

The government’s reverse mortgage scheme is worth perusing, Craig Sankey says. Photo: Getty

Question 1

We are in our eighties and have $1 million in super, which we require income from to fund our lifestyle. We would like to give funds to our three children before we pass on. Is reverse mortgage a consideration? Our home is worth $1.5 million and is mortgage free. 

I like how you are considering your estate planning options and beneficiaries now. It’s becoming more common to pass funds on before you die, rather than after death, as it has a few advantages:

  • You get to enjoy your seeing your beneficiaries make use of your gift
  • Your beneficiaries will probably get more use out of the funds now rather than having to wait until they are old
  • Taking money out of super before you die has no tax consequences.

A word of caution, though. Make sure you leave enough income and capital for yourselves (including leaving a buffer) before giving the funds away.

Secondly, also be aware that Centrelink will assess any gifts for five years under the income and assets test. This could be problematic if taking funds from your home, which is exempt from asset/income testing and then turning the funds into gifts, which are assessed.

If you are not currently, or likely, to be in receipt of an age pension then this may not worry you. But for others it will. A reverse mortgage is still an option, but you need to consider any age pension impacts.

An alternative option is to give away some of your super first, which is already income and asset tested, and then use the government’s reverse mortgage scheme, entitled home equity access scheme to help fund your lifestyle.

While the super gift is also counted by Centrelink, super is already counted, so it’s a net neutral position for age pension purposes.

Existing age pensioners and self-funded retirees can both apply.

The amount you can receive under this scheme is smaller than from a retail provider, but it may be suitable if you are just after a top up to your income from your super.

The interest rate is a very competitive 3.95 per cent per annum.

Taking out a reverse mortgage, whether from a retail provider or from the government, is a big decision. Therefore, I recommend seeking legal advice and financial advice over whether you should proceed and the best structure to do so.

Additionally, if you do go ahead, make sure you update your will to take this into account.

Question 2

My wife and I both have super accounts with the same fund – accumulation & income.  Fees and costs for the last financial year have increased considerably. I queried the substantial increase in costs/fees and was informed the increases were in order as the fund had rewarded (bonuses) those responsible for obtaining the returns. The majority of funds have been allocated to cash. I have noted other super funds are offering much lower fees/costs.  Could you please provide the pitfalls of changing funds? Thank you – your news items are appreciated. 

Transferring or ‘rolling over’ your super fund should come with relatively few fees.

  • There may be some buy/sell costs when moving from different investment options or different super funds. However, if most of the investments are in cash this should be minimal
  • Whilst not a cost, when transferring funds you will be out of the market for a few days. If markets go up you would lose some growth, but conversely if markets go down you would not be affected. Again, if in cash you would only lose a few days of interest.

Fees and performance are the two areas people focus on when choosing a super fund and rightly so as they could have a large effect on your end retirement balance.

However, you should also consider what insurance you would lose and what you would gain in transferring. Some funds allow you to transfer your existing insurance cover from your old fund.

If you have a MyGov account, you can compare different super funds and it is now very easy to transfer your super to a new fund with a click of a few buttons.

When comparing super funds make sure you are comparing investment options within those funds that are suitable for yourself and are like for like.

Transferring super is fairly easy these days and comes with very little costs.

The most important part is selecting a fund that performs well after fees and has the insurance and any other member benefits (ethical investments as an example) that you may value.

Question 3

I’m turning 61 in November. I retired last year but have lived off my savings outside my super. But by next year I will need to access my super. Complicating issue is that, my ex-wife has about 15 per cent of the funds tied up to the super fund. She went back to the USA and it is uncertain when she will make attempts to arrange the funds to be taken out. She relinquished her residency. Am I able to draw money from my super when I’m ready?

Yes, you should be allowed to draw down your portion of the super.

You will need to speak with your super fund in relation to how they have flagged the 15 per cent that will go to your former partner.

However, this should not preclude you drawing down from the remaining part of your super fund.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.

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