I’m separated from my ill husband. How will this affect our pension?

Can you explain how the pension is calculated for a couple separated due to ill health? My husband is in a nursing home and I can’t understand how the amount that the Department of Veterans’ Affairs has paid us is worked out. Our assets are $580,000 excluding the house and refundable accommodation deposit (RAD).

Regan Welburn, of My Pension Manager, says for couples separated by illness, the starting rate of pension is based on the maximum single pension rate. This is currently $1144.40 per fortnight compared with the couples rate of $862.60 each.

Couples are in the same boat when it comes to the pension, even if they live apart.Credit: Simon Letch

The test for couples separated by illness is still based on the couple’s means test (not the single pensioner means test). For an illness-separated couple that is classed as a homeowner with $580,000 of assets, the calculation would be as follows: $110,000 over the $470,000 asset-free area means pension entitlement reduces by $165 per fortnight, per person ($1.50 reduction for every $1000 of excess assets), so their pension payment becomes $979.40 per fortnight, per person.

You say the problem with the super re-contribution strategy is that you cannot nominate which tax components you withdraw from, and once the re-contribution is made, the earnings form part of the taxable component. Please clarify what is meant by ‘cannot nominate which tax components you withdraw from’, if your super is totally in pension phase and tax-free. Would any re-contributions then go into an accumulation phase and subsequently be converted to a second pension account?

Even if your entire super balance is in the earnings-tax-free pension phase, it’s crucial to understand that if there are taxable and tax-free components within that balance, you can’t choose which component your withdrawals come from – it’s always proportionate. For example, if 30 per cent of your super balance is tax-free and 70 per cent is taxable, every withdrawal will reflect that same split, 30/70.

If you take money out of your pension and then re-contribute it back into super (as part of a re-contribution strategy), these contributions will enter the accumulation phase. While in accumulation, the earnings are taxed at 15 per cent, and those earnings add to the taxable component of your balance.

If you wish to convert these newly contributed funds to pension phase, you will either need to start a second pension account (as you cannot add to an existing pension account), or start a new pension by consolidating the existing pension with the accumulation funds.

It takes a bit of work to get a handle around the complexities of super. For example, on the one hand we are told that concessional contributions come from before-tax pay while non-concessional contributions come from after-tax pay. Then on the other hand, we are told a personal contribution can be made from after-tax pay which, when claimed as a tax deduction, is a concessional contribution. Have I got it right? If so, this would mean an after-tax contribution can be treated concessionally.

Let’s take it step by step. There are contributions for which somebody, the employer or a private person, makes a contribution and claims a tax deduction. These are called concessional contributions because of the concessional rate of tax applied.

It’s also possible to make contributions from after-tax dollars such as accumulated savings or a legacy – these are called non-concessional contributions because they receive no tax concessions by way of a tax deduction.

All personal concessional contributions must come from after-tax dollars – you would be double-dipping if you made them from pre-tax dollars as a tax deduction and then claimed a further tax deduction for the contribution.

Robert Kiyosaki claims “negative gearing is the government subsidising a loss-making business”. Doesn’t negative gearing mean that you can borrow a larger sum to invest in a property, as the additional interest cost will be offset by any personal income tax that you pay. Therefore, the government is paying the interest on your increased mortgage.

The term negative gearing means that you borrow for acquiring income-producing assets, which could be shares – in line with normal accounting practice, any excess expenses are tax-deductible.

Over the years, it has become synonymous with investing in property, but that’s not strictly true. The fact that an item is tax-deductible does not mean the government is paying the interest for you.

Most people earn less than $135,000 a year and are in the 30 per cent tax bracket. The outcome is the borrower pays 70 per cent of the loss from after tax dollars, and the government puts in 30 per cent.

There’s a nasty sting in the tail. A major part of tax deductions from rental property come from the depreciation allowances which don’t require an immediate outlay of cash because you’re writing assets down in the balance sheet. The crunch comes when you sell the property and all those non-cash charges increase your capital gains tax bill.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. [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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