Pension Options

Question

My husband has a super scheme that he may access at age 55 (soon!). At that time he has three options

1. to take a monthly pension for the rest of his life and should he predecease me then I should receive 50% of his entitlement for the rest of my life, or
2. take a lump sum payout, or 
3. commute 25% as a lump sum and receive the balance as a pension on the same basis as 1

This pension is CPI adjusted and paid out tax free. We are about to relocate, which will necessitate us re-accessing mortgage borrowings to get into the property we wish to buy.

My question, and a source of much vigorous discussion between my husband and myself is what would be the best option for us. I tend to think cash up and have no mortgage and with the capital gain on property when the children are no longer living at home, we could downsize and take the capital gain as a type of pension. I like that we would not be paying mortgage interest rates and appreciate what a fortunate position we could be in by having a property we desire with no or little mortgage, and could even consider buying an investment property to rent.

My husband likes the security of having a pension for life, or at least 3/4 of a pension if we took the 25% option. I suggest this is a gamble as despite him being in very good health we don't know what the future holds.

Your advice would be very much appreciated. Thank you so much for the opportunity to contact you.

Kind regards,

Lisa

Answer 

Firstly, you are fortunate to have a super scheme, so many have been wound up since 1989 due to the Government’s extremely poor treatment of employers, that provide schemes and investor members as well. Our leaders bleat loudly about our lack of work based savings but tax to death both parties to the plan – it is no wonder we are a nation of poor savers. 

We really do need an enlightened approach to investment encouragement – why would folk earn, pay tax on the earnings, invest for their future and then again pay tax on these investment earnings, in many cases at a higher level than their current marginal rate. 

With this regime in place it is little wonder we see folk boots and all into residential property conveniently omitting to return the capital gain as taxable income as they should.

Do not get me wrong, I’m very happy for folk to grow wealth anyway possible and some residential property is OK. But I would like to see a level playing field for all investment activities as the current structure is seducing many into tax evasion, at their peril. 

The choice you face is really one of who do you want as your investment manager, yourselves or a superannuation fund. Plus, if your husband did die early would you be willing to, in effect, give away half of the capital that drives the pension annuity. 

A second point that few consider is if the lump-sum and/or 100% pension option is elected and you were to separate in the future the pension or at least the plan value is considered relationship property, will he have the ability to fund your share as a lump sum at settlement. 

I’m really of the school that likes to have control of capital so I would take the 100% lump-sum and invest that myself (just as any superannuation manager would). 

There is little mystery in pensions and the actuarial tables that drive them are available. The normal structure is one that allows a pension of something like 3.00% to 4.00% of capital per annum to be distributed. Therefore capital erosion is unlikely over time. The lifetime benefit is fairly easy to achieve as is the inflation adjusting. That said, in times of high inflation or if we were to get a steep ramping up of inflation the drag on capital is important to consider. 

Your understanding of the taxation of pensions is slightly incorrect, the pension is tax paid at 33.00% in your hands, not tax free. Folk rarely have pensions of $60.000 or more per annum, more likely they are around the $15,000 to $20,000 per annum therefore tax would be 19.50% in a self controlled environment. Add New Zealand Super to this for example and you are still well inside the 33.00% threshold. 

Your second point of concern is regarding the relocation and re-entering the debt environment. This column forum is not capable of considering all the issues surrounding this decision unfortunately. To consider are the wider matters of effective asset ownership, tax deductibility, debt servicing, management and longer term income requirements. 

The option of being indebted on your own residence and having a tax paid pension stream seems a poor choice. Lastly, be sure you consider capital gain, in your workings, at modest levels say 1.00% above inflation long term or you may be disappointed.

Original Article published November 2005