Superannuants can increase their pension account by between $100,000 and $360,000 under changes to the Total Balance Cap from July 1. How to make the most of new thresholds, tax offsets and co-contributions.
New research asking people aged 55-plus their perceptions on how they’re viewed by the younger generations found widely held but simplistic views about attitudes, capabilities and finances, highlighting why it’s ridiculous to make assumptions based on age.
For seniors, a property love affair needs a ‘cold dose of reality’
The Australian love affair with bricks-and-mortar investment needs a “cold dose of reality” for those nearing or in retirement, says Terry Vogiatzis, director (wealth management) at the Sydney-based adviser firm Omura.
He says aside from the risk of not being able to service the loan, especially for those who have retired, typically it’s a cash-flow-negative investment and, when you’re retired, you generally want cash flow to live comfortably.
“We’ve had a couple of client scenarios recently where we’ve found that holding residential property prevented them from meeting their retirement objectives,” he says.
“It’s not that residential property is necessarily a bad asset class; it’s simply that most of the return comes from growth, and you can’t spend the growth. As I say to clients, you can’t sell a bathroom to fund a holiday.”
Vogiatzis says even if it’s assumed that the total return on a property investment is on par with a liquid growth portfolio (shares), what must be remembered is that only a smaller percentage of the property return comes from income (typically it’s two per cent yield and six per cent growth).
Take the example of a couple with $1.5 million invested in residential property who want to spend $70,000 a year in retirement.
“Although the property may be growing in value at $90,000 a year, the typical net yield on this $1.5 million residential property is about 2.5 per cent or $37,500.
“Take out self-managed super fund (SMSF) compliance costs and you’re left with $35,000 to spend. This return composition would generally lead to the assumption that they don’t have enough money to live comfortably.”
He says the contrast with a liquid portfolio is stark because a similar couple could withdraw $70,000 a year and only be withdrawing about 4.7 per cent of the portfolio.
“Therefore, even if it produced a lower total return (assume seven per cent a year) compared with the $1.5 million property, you could continue withdrawing $70,000 a year and your balance would increase by 2.3 per cent – or $34,500 – a year, allowing this couple to meet their retirement objectives.”
He says the logic of this argument still challenges some seniors because there’s
an emotional pull to bricks and mortar.
“What I remind them is that you should be holding high-yielding assets in a low-taxable environment and low or negative-yielding assets in a high tax environment. So, negative gearing is no benefit if your tax rate is nil – the situation for SMSFs in the pension phase.”
Vogiatzis adds another note of caution for those nearing or in retirement who have super in an SMSF – appreciating that the biggest benefit of residential property is being able to access low-cost debt, enabling the return on the investment to exceed the cost of the debt.
“When borrowing to invest personally, this generally isn’t an issue. The cost of borrowing is about six per cent, and historically residential property has provided a total return of more than six per cent.
“This changes when borrowing inside an SMSF where the borrowing costs via an LRBA (limited recourse borrowing arrangement) are between one and two per cent higher (see table). Add the extra accounting and compliance costs required to administer an SMSF just to hold the property, and your rate of return required to break even, or benefit from the borrowing, can be up to eight or nine per cent.”
These high borrowing costs can result in a negative return even in a year where property prices have risen modestly, such as in 2024. Factor-in stamp duty and the example looks even grimmer, particularly when comparing it against a simple alternative (index funds) in 2024, even allowing for the strong equities market last year.
| Chalk and cheese: Personal debt v LRBA | ||
| $1m Sydney property, $800,000 of debt | Personal debt | LRBA |
| Net yield (2%) | $20,000 | $20,000 |
| Capital growth (3.4%) | $34,000 | $34,000 |
| Interest expense (6.5% v 8%) | -$52,000 | $64,000 |
| Tax refund | $10,240 | $6,600 |
| Total return after tax / negative gearing benefits | $12,240 | -$3,400 |
| Return on invested money ($200,000) | 6.12% | -1.7% |
