How much of my super should I keep in cash?

I’m a 67-year-old self-funded retiree with $1.3 million in super, and I am thinking about adjusting my investment mix to boost my cash holdings. Can you please clarify something for me? You’ve said, “It’s important to have at least three years of planned expenditure in the cash-type area.” Does “cash-type” refer to the cash option within my super fund, or are you suggesting something like a term deposit, meaning I should withdraw three years’ worth of spending and hold it outside super in a bank account?

Constructing and maintaining an effective retirement portfolio can be challenging. The rate of return you achieve largely determines how long your money will last, and the best long-term returns typically come from growth assets like local and international shares.

Working out how much cash you should stack inside – or outside – your super can be a conundrum.Credit: Simon Letch

Shares offer liquidity, but also bring volatility. Historically, each decade delivers about six strong years and four negative ones. That’s why retirees need a solid safety buffer so they are never forced to dump growth assets when the market is having one of its normal downs

I’ve long recommended setting aside three years’ planned expenditure. For those on a part age pension, there’s a cushion – if assets fall by $100,000, the pension may rise by around $7800 a year.

The buffer can sit in a bank account, term deposit, or even within the cash option within super. I favour cash in the bank – it’s instantly accessible. If the money is in super, withdrawals can be a drawn-out process, depending on the fund.

I’m a self-funded retiree with more money than I need to support my chosen lifestyle. I would like to gift $30,000 to each of my four sisters, all of whom are in their 70s. They’re on a full pension, have minimal savings, and either rent or carry a small mortgage. Will these gifts affect their Centrelink age pension entitlements?

Given they have minimal savings and no substantial assets, I cannot see how a gift could affect their age pension. I think it’s great that you’re doing something that can change people’s lives.

I have three adult children and would like each to receive one-third of my estate under my will. If I nominate my personal legal representative (the executor of my estate) as the beneficiary of my super, will this be as effective in minimising the superannuation death tax as the recontribution strategy, without the added complexity? It certainly appears to be more straightforward.

The death tax on superannuation – 15 per cent plus the Medicare levy – applies to the taxable component of your super when left to a non-dependent. If paid through your estate, the Medicare levy doesn’t apply, but the 15 per cent death tax still does.

The recontribution strategy, where someone under 75 withdraws a large amount from super and re-contributes it as a tax-free component, can reduce the taxable portion. But it’s no cure-all. You can’t select which component is withdrawn, and unless you withdraw the full balance and re-contribute, some taxable component will remain and grow with earnings.

Also, once your balance exceeds $1.9 million, or you turn 75, contributions are no longer allowed. In my view, the better strategy is to instruct your attorney to withdraw all super tax-free when death is near and transfer it to your bank account. That’s the only way to eliminate the taxable component.

I’m 55 and about to leave my employer permanently. My superannuation preservation age is 60. Fortunately, I have enough investment income to retire now and don’t intend to return to the workforce. Once I turn 60, I plan to access my super.

However, the ATO states that “you can withdraw your super when you reach your preservation age and retire,” which seems to suggest that retirement must occur after age 60. If I’ve already left work before turning 60, will I still meet the condition of release once I reach 60?

Yes, you will satisfy the condition of release once you turn 60, provided you have genuinely retired and have no intention of returning to the workforce.

The rules distinguish between retiring before 60 and retiring after 60, but in your case, the key factor is your status and intention at age 60. Although you will have ceased work before reaching your preservation age, once you turn 60, you can access your superannuation on the basis that you are retired and have no plan to return to gainful employment.

There is no requirement that you must actually leave work after your 60th birthday. As long as you are over 60 and not working, the retirement condition of release is met.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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