Reply: 2.2.1
From: Mike .
Hi Seagull,
Following on from my previous post you were interested to know what I meant by "converting the equity of your property into an Immediate Annuity".
That remark was off the cuff and offered as a possible strategy in preference to selling the properties and investing the money with financial institutions that may collapse. I encourage you to find a strategy that provides an adequate income without risking your capital. If that means holding onto your properties, so be it. If that means incurring more tax, so be it.
Once you retire, if you left things the way they are, your income would come from two sources: the DIY Super scheme and rentals from your IP's. Question is, can you rearrange your assets to minimise tax, hedge against inflation, qualify for pensioner concessions, all without risking your capital?
Since this is a complex issue it requires the expertise of a Financial Advisor who knows the requirements for qualifying for a part-pension under the provisions of the Assets Test or the Income Test. BTW you only need to qualify for as little as one dollar of the pension to get the full pensioner concessions.
Immediate Annuities have full or partial exemption from the Income Test so would be a preferred source of income than rent which is not exempt.
Your home is exempt from the Assets Test but not so your IP's. Ideally, you would be in a better position to qualify for the pension if most of your capital was in your home. However, if this were the case, you would fall into the category of "asset rich, cash poor".
The solution here is what's called a Home Equity Conversion Scheme (HECS). Not to be confused with a Home Equity Loan. Here are a couple of definitions:
Definition:
A home equity conversion agreement is a mechanism which allows a homeowner to convert all or part of the equity locked up in their home into cash or a stream of income. A key feature of a home equity conversion agreement is that the loan (including interest) is generally not repayable until the homeowner moves out or dies.
Another definition:
A loan secured by a mortgage of the borrower's home under an arrangement which does not require periodical payments of either interest or capital, the intention being that the total debt will be repaid on the death of the home owner (or on the death of the survivor of a married couple).
As I understand it, the income stream from HECS is exempted from the Income Test.
I don't want to get bogged down in details because I am not qualified to discuss those. An important point to consider, however, is make sure the lender is insured if they default on the arrangement (ie if the company collapses). They will be insured for losses incurred if you outlive the arrangement.
Centrelink provides a free Financial Information Service (FIS) so may I suggest you talk to them and see if it is worth restructuring your assets. I've attached a text file which explains FIS's services.
Regards, Mike