Ask the Expert: Drawing down on capital and finding good advice

Licensed financial adviser Craig Sankey answers your burning finance questions.

Licensed financial adviser Craig Sankey answers your burning finance questions. Photo: TND

Question: I was retrenched in 1991 at age 56 and self-funded my retirement entirely through fixed-term deposits. My wife and myself received a part pension on reaching 65 and our assets, mainly cash, were divided equally between us.

My wife recently passed away and our total assets are now in my name. This has resulted in my part pension being reduced from $914 per fortnight to $265.

With earnings from my FTDs, earning less than 1 per cent, I now find my total fortnightly income to be $517, which only just pays my fixed expenses e.g. rates, electricity, car regos, insurance, health insurance and Telstra etc. I am a non-home owner and 85 years of age. What do you suggest? 

Yes, $517 a fortnight to pay all of your fixed expenses must put you in a very tight financial position and one that I do not envy.

From the figures you have provided, it looks like you have about $700,000 or so in assets which are very conservatively invested but also affecting your age pension rate.

It also appears you are only living on the interest and not drawing down on the capital. Perhaps you have a reason for this, such as wanting to leave a large estate to your beneficiaries, but I suggest you consider drawing down on at least some of this each year to top up your income.

This will have several impacts. Firstly it will give you additional immediate income to meet your expenses. Secondly, for every $1000 you spend down in assets your age pension will increase by $3 per fortnight (or $78 per annum).

Another way of looking at this is that you are currently earning less than 1 per cent in term deposits, but by spending $1000 you get an age pension increase of 7.8 per cent.

Now, there are a few caveats to this suggestion.

I would only ever recommend you spend the money on expenses or items you actually need, and not simply waste the money to get a larger age pension. This would make no sense.

Also, for a single non-home owner, once your assets fall below $482,500 (as at April 2021), you would receive the maximum age pension under the asset test, so spending additional amounts of your own money would not increase this.

If you are concerned about leaving some funds behind for your beneficiaries, you might want to only draw down small amounts of capital each year. You could also consider purchasing a funeral bond, as not only will this help pay for a future funeral, but the first $13,500 is not assessed by Centrelink (this figure is for the 2020-21 financial year).

There are other strategies you could adopt, such as taking a slightly more aggressive investment approach, but you should only do this if you feel comfortable in doing so.

Alternatively, you could consider purchasing an annuity, which can provide a guaranteed income over several years, or even your lifetime, whilst also providing some Centrelink benefits.

I suggest speaking to a financial planner, who can put together a personal financial plan that takes into account your income requirements, Estate Planning objectives, and any other goals you may have.

Question 2: [Could you suggest] sources of free, reliable advice to improve my financial literacy? Your column is one.

Thanks for reading my column.

Thankfully these days there are plenty of places to find reliable, topical financial information.

Being financially literate in order to take control of your finances is critical in today’s society, because whether we like it or not, so much of society is driven by money.

The federal government also recognises how important it is, not just for individuals but for the country as a whole, which is why they have a ‘National Financial Capability Strategy’, where they focus on three core behaviours:

  • Managing money day to day
  • Making informed money decisions
  • Planning and saving for the future.

You can read more about the above here.

Other good sources of information can be found at the following:

  • Moneysmart – it is run by the Australian Securities and Investment Commission (ASIC) and has a large selection of articles, tools and tips that I use and would recommend to anyone. Part of its role is to help Australians with their literacy and make good financial choices.
  • Super Guru provides some useful information and education regarding superannuation and does not accept advertising or try and sell any particular product.

Other consumer sites offer a lot of helpful and reliable content for free, before having to pay for additional articles or information.

Sites that I sometimes use include Money Magazine and Superguide, as well as many industry super fund sites*.

The Financial Planning Association of Australia* (FPA) has the most members (Financial Planners) of any Financial Planning group in Australia.

It runs a website called Money & Life that is dedicated to helping Australians improve their financial wellbeing. This site can also put you in touch with a licensed financial adviser to help you with personalised advice.

*Disclaimer: Industry Fund Services is owned by some industry super funds and I am also a member of the FPA

Craig Sankey is a licensed financial adviser and head of Technical Services & 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. 

The New Daily is owned by Industry Super Holdings

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