Noel Whittaker July 25, 2012
My uncle, 90, went into a nursing home last August. He had a house and $260,000 in the bank - the nursing home required $250,000, leaving some cash for his bills. The pension covers his annual board. We sold his house for $1.1 million recently and are now faced with what to do with the money. We understand he will lose the pension and his fees will escalate. Given his money will earn 5 per cent, the interest will only just cover his expenses. How can we minimise the monthly outgoings?
The increase in his aged-care cost is not at the discretion of the aged-care facility - it is a fee charged by the Department of Health and Ageing. It is known as the income-tested fee and is used by the government to offset the funding they contribute for your uncle. The fee cannot exceed the cost of care or the daily maximum amount, which is $67.04 a day. With $1.1 million in financial assets, your uncle's deemed income would be $48,819 a year and should attract an income-tested fee of about $31 a day. A popular strategy for reducing the income-tested fee is to hold an insurance bond inside a family trust. This is a complex area, so take advice from an aged-care specialist.
Could you please explain ''transition-to-retirement'' (TTR) accounts within superannuation? What is the purpose of these accounts, the pros and cons, and their limitations?
The original purpose of TTRs was to allow a person to reduce their working hours and at the same time use some money in their super to compensate for their reduced salary. They are highly effective for anybody aged 55 or over, because they allow you to take advantage of the difference between your marginal tax rate and the 15 per cent tax charged on salary-sacrificed contributions to super. Since the concessional cap has been reduced to $25,000, they are not as effective as they were but are still worthwhile in most cases. Your adviser will be able to do the sums for you.
My wife and I are 28, our combined income is $128,000 and we have a mortgage of $340,000 with an offset of $8000. We have shares totalling $27,000 with a margin loan of $15,000. We can save about $400 a week. We want to have a child but fear we cannot live off one income. Should we build up our share portfolio to generate income through dividends, or are we better off making extra payments off our mortgage or putting more money into our offset account?
At this stage you should be focusing all your efforts on getting the housing loan down to a level where it could be comfortably handled on one income. Any funds paid off the loan will be earning you an effective 6 per cent capital guaranteed after tax and no growth investment can match that. When working out what is a comfortable level, use the factor of $900 a month for each $100,000 owing. For example, if you believe that $2700 a month is something you could handle easily, your goal should be to reduce your loan to $300,000.
I've previously looked into setting up a high-interest saver account to put away a minimum 10 per cent of my wage each week. I found an online saver account where I could earn 5 per cent interest and asked my mortgage adviser his opinion. He stated it would be better to transfer the money into our mortgage offset account, as this would help reduce the interest payments and pay off the principal faster. He also said I would pay tax on the interest that was made in the high-interest account. Do you agree with this advice? Would leaving the money in the offset account be the better option?
I certainly do agree with the mortgage broker. You will be paying tax on the earnings from money held in an interest-bearing account and the rate will never be as high as you could effectively obtain in the offset account. The cream on the cake is that earnings in the offset account are tax-free, as they are deducted from your home loan.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature. Readers should seek their own professional advice. Email: email@example.com.