I’m 67, in debt and with no super. How do I spend a $450,000 inheritance?

I am a single 67-year-old with no superannuation. I own my home, have a 12-year-old Toyota, no other assets, and a $60,000 tax debt. I work casually, earning less than $50,000 per year, and am about to inherit $450,000. Can I pay my tax debt and spend $100,000 on maintenance and renovations to reduce my cash to the $314,000 limit for a single person to be eligible for the aged pension?

Yes, you can pay off your tax debt, which would reduce your assessable assets to approximately $390,000. However, the cut-off point for a single homeowner to receive some age pension is $695,500, so you don’t necessarily need to bring your assets down to $314,250 to qualify.

There can be many different strategies for handling an inheritance.Credit: Simon Letch

Spending on essential maintenance or renovations is acceptable, if necessary, but you may not need to spend the full $100,000. For instance, if you spent $50,000 instead, leaving you with $340,000 in assessable assets, you’d qualify for a part pension of $316 per fortnight, along with concessions.

The difference between this and your pension entitlement, if you spent $100,000 on renovations, is only $22 per fortnight. Retaining the extra $50,000 for personal use or enjoyment may be a better option. As you spend down your assets over time, your pension entitlements will naturally increase.

Recently, in response to a reader asking about adding the downsizing contribution to their existing superannuation, you wrote that “the capital sum contributed would be tax-free, but earnings would form part of the taxable component”. Could you clarify how this works upon death?

Specifically, in the case of an SMSF where all contributions are tax-free (i.e., after-tax contributions), and the fund is in the pension phase (where income is earned, and pensions are paid), is there still a taxable component? If so, how is it calculated?

When a person is in the accumulation mode, all concessional contributions whether made by the member or the employer, together with all earnings are regarded as the taxable component. The only non-taxable component is non-concessional contributions and this number does not grow when the money is in accumulation mode.

However, when a pension is commenced, the proportion of taxable and tax-free components are locked in for the life of that pension. That means any earnings will be split between the two components with the same proportion. If the pension is commenced 100 per cent with after-tax contributions only, then there will not be any taxable component.

In the original response, the downsizer or after-tax contribution was made to superannuation as a 100 per cent tax-free component, with the assumption that it remained in the accumulation phase (rather than being moved to the pension phase), where any earnings generated would create and add to the taxable component.

I’m 67, started work in 1974, and am still working part-time, three days a week, as I gradually transition into retirement. My gross salary is $44,000 annually, with an employer super contribution of approximately $5000 per year. I’m considering salary sacrificing up to 100 per cent of my fortnightly pay, capped at $30,000 per annum, into superannuation.

My question is: would this be permissible under current tax laws, and could it be done without running into any taxation issues?

Salary sacrificing to the limit is usually not a practical option for someone in a lower tax bracket. The optimal amount of taxable income is $35,813, where any tax liability is fully offset by applying for the Low-Income Tax Offset (LITO) of $700 and a Seniors and Pensioners Tax Offset (SAPTO) of $2118.

Salary sacrificing about $8000 should help you get to this level of taxable income. It would also be worth considering making an after-tax contribution of $1000 to attract the government co-contribution of $500.

My partner has just turned 65, and his work is slowing down. He has $300,000 in superannuation. Can he allocate $50,000 to an income stream, and if his income improves, transfer the money back to his super account? When setting up an income stream, is the percentage drawn based on the original $50,000 or the balance after withdrawals?

A better option might be transferring the entire $300,000 into pension mode. This puts the full amount in a tax-free environment, with tax-free withdrawals as needed.

At age 65, the minimum drawdown rate is 5 per cent, so he must withdraw $15,000 per year (pro rata for the first year if pension is commenced part way through the financial year) but can take extra as lump sums if needed.

If his income improves, he can contribute back into super as concessional or non-concessional contributions until age 75, assuming funds are available.

The drawdown percentage is based on the account balance at the date of the commencement of the pension, then subsequently the balance at the start of each financial year (e.g., $300,000 or the balance on 1 July), not the original amount or post-withdrawal balance.

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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