How do I give $200,000 to my grandkids while saving tax and keeping my pension?

I have $200,000 in a term deposit for my five grandchildren, accumulated from inheritance and other sources over the years. Their ages are 26, 24, 22, and two are 21. I do not wish to give the funds to them yet and want more details about insurance bonds. If I held a bond in my name and planned to distribute it to my grandchildren in five years or upon my death, would this bond be considered a deprived asset for pension purposes? How would the interest accruing impact my tax or that of my grandchildren if I had separate bonds for each of them?

This is an unusual question because insurance bonds are normally used by grandparents to invest for younger grandchildren to avoid the punitive children’s tax on investments for minors.

But in this case, all beneficiaries are adults, so the income derived from gifts to them could be taxed at regular adult rates, with the 30 per cent tax rate only applying when income is over $45,000 a year.

When it comes to gifting money to your grandkids, think carefully about tax implications – for both you and them.Credit: Dominic Lorrimer

The issue is that insurance bonds are taxed at 30 per cent on all income, making them less effective for adults unless they have high earnings.

Since you are a part pensioner with low taxable income, a better strategy might be to open five separate bank accounts or investments in exchange-traded funds (ETFs) in the children’s names, with you as the trustee.

The children would pay tax on these investments, so you should discuss this plan with them. Changing ownership to trustee status will be treated as a “deprived asset” by Centrelink, but it shouldn’t change your current situation. After five years, this gift will no longer be counted, and if you are asset-tested, your pension could increase by up to $15,600 a year.

We are in our 70s, have super in pension mode. For a period, we received a small age pension payment, but this ceased when the asset limit was lowered. Later, a change allowed us to regain age pensioner status, although we did not receive any payments. If we downsize our home and contribute additional funds to our pension accounts, will we continue to be classified as age pensioners? Is there a point at which we would no longer qualify as “pensioners”?

On January 1, 2017, some significant changes hit the assets test for pensions. The assets test free areas got a boost, and the taper rate for pensions increased to $3 per fortnight for every $1,000 over the assets test free area.

If you lost your pension because of these changes, you were automatically given two health cards: the non-income tested Commonwealth Seniors Health Card (CSHC-NOI) and the non-income tested Low-Income Health Care Card (LIC-NOI).

On October 9, 2017, the LIC-NOI was swapped out for the non-pensioner Pensioner Concession Card (PCC). Here’s the best part: you don’t need to be receiving a pension to keep the card, and there’s no income or assets test to qualify.

Our friend is a 64-year-old professional woman who has never married and has no children. Both her parents have passed away. As the only surviving child she has inherited their assets, including the former family home. She is currently not working and does not intend to retire. However, she plans to access her superannuation to cover living expenses. Once she resumes work or receives proceeds from the sale of her parents’ home, she intends to recontribute to her super to strengthen her financial future. Can she withdraw funds from her super now and recontribute them later?

As she has reached the age of 60, and is currently not working, she has satisfied a condition of release and can withdraw money from her super tax-free whenever she wishes.

I assume she would choose an account-based pension because then the fund earnings will become -tax-free. She can contribute both tax-deductible and non-tax deductible contributions to age 67, and between that age and 75 would need to pass the work test to make deductible contributions – she can make non-deductible contributions to age 75 provided her super balance is less than $1.9 million.

You recently discussed strategies to avoid the 15 per cent tax on death relating to the taxable/concessional portion of benefits by making withdrawals and re-contributions. In our SMSF deed, there is no distinction between concessional and non-concessional member accounts or benefits. Can the trustee be directed to distribute only the concessional balance, while leaving the non-concessional balance intact?

The regulations are clear and apply to all superannuation funds. You cannot nominate specific tax components when making withdrawals from your super account – it must be withdrawn in proportion.

A re-contribution strategy is effective in reducing the taxable component but the most effective way is to have your attorney withdraw your entire balance tax-free before your death and put it in your bank account.

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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