Question
I am an octogenarian and about to receive compensation of $430,000 after developing an asbestos-related cancer.
My wife and I receive the full pension, own our own home, have two cars worth $15,000, and contents and personal items worth $10,000. We no longer have any money left in super.
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I plan to pre-pay our funeral costs from this money and I want to help my daughters by paying their mortgages out.
Surely the rules of gifting wouldn’t apply to us?
Answer
Unfortunately, the source and reason you received these funds is not considered in the means-testing system.
Centrelink simply applies social security legislation which says that if you have the means to either fully or partially fund your own retirement, you are compelled to do so through means testing.
Within 14 days of receiving the payment, you will be required to notify Centrelink. At that point — and assuming you have say, $20,000 in savings — your total Centrelink-assessable assets will include all of the banked funds, or $450,000, plus the cars and contents at $25,000. All up, $475,000.
This puts you over the current homeowner asset test limit of $470,000 by $5000. Do nothing and your combined fortnightly pension will drop by $15 a fortnight. Pre-paying your funerals will certainly bring you back under the threshold for a full pension.
The gifting rules — where you can reduce your financial assets by $10,000 a year with a maximum of $30,000 over a rolling five-year period — will still apply, but they will have no effect.
You will still need to advise Centrelink and the gift will stay active on your records for the next five years. This is in the event other assets are received and, collectively, they could tip you over the limit again, or one of you passes and the lower single means-test limits will apply.
For this reason, it might be beneficial to ensure Centrelink records the gift as coming from you alone as the deprivation would disappear if you pass away.
You might also consider keeping some money in reserve for possible future expenses including aged care costs.
We are sorry to read of the reasons for your payment and wish you all the best.
Question
In a recent Your Money article, you wrote about life insurance companies charging what amounts to a loyalty tax on existing clients who are forced to pay the higher premiums.
That forced us to take a close look at the level of cover we have in place and realised that we can save more than $1000 a year by using our super.
Thanks for that very useful information, but we now need to know how to do it.
Answer
Superannuation funds use what are called group insurance schemes, where the entire pool of members of the fund is effectively insured through a single policy.
The significant discounts come about by the dramatic economies of scale, plus the fact that no commissions are being paid.
One important point, however. Compare the total and permanent disability claim definitions of the super fund’s policy to your existing policy if you need that cover. Sometimes, a TPD claim will only be accepted if the member cannot return to any form of employment, not their original occupation.
To effect the transfer, obtain a “certificate of currency” or other proof of cover from your existing insurer which you can probably download from their website.
Next, write to the customer service team of your super fund, requesting they transfer the cover setting out the amount of cover you want to add and enclosing proof of the existing cover.
The super fund will forward the request to the insurer and they will respond in writing.
Wait until you have the written confirmation in hand, which will also explain how to accept the terms of the transfer offer. Once you have activated the transfer, cancel the old policy.
Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association