Unexpected retirement, unexpected problems and unexpected solutions—Part 1
An unexpected or forced retirement may come from ill health, an accident, retrenchment, caregiving demands or a number of other circumstances. This post is the first of two, with the follow-up post next week. Both are looking at strategies for handling unexpected retirement.
Unexpected financial issues with forced retirement often include:
- Access may be restricted to your superannuation entitlements until you reach retirement age unless you can prove genuine financial hardship or permanent disability.
- Centrelink benefits may not be an option and the benefit or allowance may be well below the amount required to cover your living expenses.
- The timing of your unexpected retirement may coincide with a major correction in the investment markets leading to a loss of capital. Known as Sequencing Risk, this occurs when markets become overvalued—often referred to as a ‘bubble’. When the bubble bursts, a significant downturn in investment markets can be of real concern to retirees, particularly if it occurs just after retirement, because there may be a loss of capital that can’t be replaced even by going back into the workforce.
- There may be unplanned tax consequences if you need to sell investments that attract Capital Gains Tax (CGT). And there could be adverse tax outcomes from the timing of termination payments such as unused leave and long-service entitlements.
After examining your financial position, you’ll need to prepare a budget that you can live with. There are a number of useful and free budget spreadsheets on the internet. Your superannuation fund may offer this service on their website.
A budget will also assist in working out the income you’ll need over the next 12 months. It’s useful to attempt an assessment of expenses for the next five years.
Access to your superannuation
Your age plays an important part when it comes to when and how you can access your superannuation—unless you can prove financial hardship or have a permanent disability.
Superannuation regulations have a preservation age. Until you reach your preservation age, access to your superannuation money is restricted. The preservation age starts at age 55, but it’s being gradually increased to age 60.
Once retirees reach their preservation age and retire, they can take their benefit as a lump sum or as an income stream. Special rules known as the Transition to Retirement apply to those who access their superannuation in the form of a non-commutable pension while continuing to work.
The subject of the early release of a member’s superannuation benefit is currently under review. The review will look at the question of financial hardship and will attempt to identify the point at which compassion outweighs the broader policy objective of the superannuation system—to generate an income in retirement.
Here’s a brief overview of some of the Centrelink income payments you may be able to claim. This is not a full list, though. Keep in mind that all Centrelink payments are subject to a two-phase process:
- An assessment of a person’s eligibility and
- An assessment of the person’s entitlement based generally on an Assets Test and an Income Test. The test that results in the lowest rate of payment is the one that’s applied.
You may be eligible to receive a payment, but not qualify because you fail either the Income or Assets Test. And it should be pointed out that the income support paid by Centrelink, may be small. Some Centrelink payments are tax-free, but the majority are taxable (such as the Age Pension).
Here are six types of Centrelink income support payments that could be relevant:
- The Age Pension is paid to residents of aged-pension age subject to the Assets and Income Test.
- Newstart allowance is paid to those who haven’t reached aged-pension age and no longer work, or work limited hours.
- Disability support pension is paid to those who are unable to work due to incapacity because of long-term illness or limited mobility, and is subject to a medical assessment.
- Carer payment is paid to those who provide full-time, home-based care to someone who is disabled, frail or has a medical condition, or requires aged care.
- Carer allowance is paid to those who provide daily, home-based care that may be in addition to professional care for a person who is disabled; has a medical condition; or requires aged care.
- Rent assistance is paid to those who receive a qualifying payment and who require additional assistance to meet accommodation rental payments. This payment is not paid to those who own their own home.
Generally, Centrelink payments can be applied for and managed online. The Centrelink website contains a comprehensive overview of the available income support payments. Centrelink also has special members of staff known as FISP (Financial Information Service Providers) officers who can help people who need assistance with Centrelink and tax issues.
Income tax might bite you hard
Capital Gains Tax (CGT) may be unavoidable in some circumstances if the only way of raising enough money to provide a reasonable income involves selling a holiday home, rental property or investments such as shares and managed investments.
The timing of your selling can be very important because the average rate of tax you pay while employed, is likely to fall dramatically in the year after you retire.
In the case of shares and managed investments, you may be wise to spread the sale of investments over several years. This isn’t possible when selling a property.
If the unexpected retirement occurs early in the financial year, the tax applicable for unused leave and long-service leave may be zero, or small, depending on what other taxable income is generated for the remainder of the financial year.
If, however, the retirement occurs after July or August, there’s likely to be some tax payable on leave entitlements. If superannuation lump sums are withdrawn before age 60, lump-sum taxes will also apply.
Timely advice does not cost, it pays
Professional advice from an experienced financial planner and a registered tax accountant is never more needed than with an unexpected retirement. Making rash decisions without understanding tax and investment implications can end up costing you in terms of tax and the potential loss of Centrelink entitlements.
For instance, superannuation benefits held by a spouse aren’t included in the Assets Test assessment of a couple’s investments until the spouse reaches pension age. Withdrawing money from a spouse’s superannuation account may not be a good move.
There’s wisdom in seeking appropriate financial advice as soon as possible if you face forced retirement for whatever reason.
Next week, in part 2, the emphasis is on solutions.
Owen Weeks is director and authorised representative of Lifestyle Matters Pty Ltd and a Registered Tax Agent. He is a Fellow of the Financial Planning Association, a Fellow of the Institute of Professional Accountants, and an Honorary Fellow of the Association of Superannuation Funds of Australia. He is also the co-author of Retire Bizzi and Where to Retire in Australia.
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