Ask the Expert: Where to invest for retirement – property or super?

How much will you have at retirement? That depends on the choices you make today.

How much will you have at retirement? That depends on the choices you make today. Photo: Getty

  • Question 1: I have approx $300k in super and owe about 55k on my mortgage. I am 50 and plan to have my mortgage paid off by 55. I salary sacrifice $50 a week into super and $40 per fortnight in after tax to super. Should I consider investing in a property now that prices are dropping or just put more into my super when the mortgage is fully gone.

Firstly, well done on already saving extra to super and being close to paying down the loan. You are doing ‘something’, which means you are already ahead on many people who live pay day to pay day.

Where to put extra money is a nice problem to have.

Putting extra into super or investing in an investment property both have advantages, and both have tax concessions applied to them.

With super, salary sacrifice will save you income tax, then the money will be invested in a low-tax environment.

Once you turn 60 super can be taken out tax-free either via a lump sum or an income stream. Or a combination of both.

I assume with an investment property you would be negatively gearing, i.e. borrowing to fund the purchase and claiming the interest and costs on your income tax return. If the interest and cost are higher than the rent you are receiving, then it’s called ‘negative’ gearing.

Negative gearing makes sense if you have a middle to high income and want to reduce your income tax. However, once you retire you won’t have any other taxable income to reduce, and you will need to live off the rental income.

Therefore, by retirement age ideally you would want the property ‘positively’ geared the rent paid not only covers interest and costs but there is some left over for you as well.

Balancing risk against reward

The main measure of success with investing in property is how much capital growth it will achieve i.e. how much does its value go up.

If you hold an investment property for over 12 months before selling it, only 50 per cent of the gain then needs to be added to your income tax return. If selling it after your retirement the net gain you end up paying could be minimal unless it has achieved substantial gains.

Contrary to what some people believe, generally holding one investment property is riskier than investing into say a balanced super fund.

If in a good area with good tenants the property may very well outperform the super fund, but you are talking on additional risks by putting a substantial amount of money in just one investment and not diversifying. Compare this to a balanced fund invested in hundreds of shares, bonds, cash and other alternative investments to property.

As well as a lack of diversification a property is indivisible. That is if you need, say, $30,000 to buy a car or go on a holiday, you can’t just sell a bedroom, you have to sell the whole property.

Normally, the main disadvantage to super is you cannot access the funds for a long time, but as you get closer to 60 this becomes less of an issue.

Depending on your financial objectives and investment time frame both strategies could work for you. As I said, it’s great that you are doing something. Just be aware of the risks before proceeding and consider obtaining personalised advice.

  • Question 2: My income consists of the single age pension and a fortnightly top-up from my super. I will shortly receive an unexpected legacy in the realm of $30,000 due to the death of a younger sibling. How will my pension status be affected by receiving this inheritance? I would like to pay most of this into my superannuation as a lump sum to extend the duration of my flexi pension, which is running low.

A $30,000 inheritance will have a minimal effect at most.

If you are a home owner and have below $280,000 in assets (not including your home), including your super pension, it will have no effect. This figure increases to $504,500 if you are a non-home owner (as at February 2023).

For every $1000 in assets above these amounts, your age pension reduces by $3 per fortnight.

Putting funds into super, if eligible, is a good strategy to extend your pension.

However, you cannot add to an existing pension. You can either start a separate pension, or roll back your existing pension to super, combine it with the $30,000 and then start a new one.

  • Question 3: Our daughter moved into her own home in 1997. If we need her to move into our home to care for us as we age and she decides to make it her principal residence, what are her tax liabilities if she sells her own place.  She is not likely to be needing any age pension by then, as her super pension will be adequate and she is our only willed beneficiary.

For tax and Centrelink purposes a person can only have one principal place of residence at a time.

If she sells her own place and takes ownership of yours, this would be fine for her, but you also need to consider the impact for yourselves.

  • Is your intent to transfer ownership of the property to her so she has legal ownership?
  • Will she be paying market rates for the home?
  • Will you ensure you have a life interest in the property to maintain a legal right to live in the home even though it may no longer be in your name?
  • If you are in receipt of Centrelink and pass the property to your daughter for less than market value you could be caught under the deprivation rules.

There is a lot to consider from a legal, tax and social security perspective.

If you are all on the same page, then it may be fairly straightforward but it’s best in these situations to have a documented agreement and seek legal advice.

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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