Ask Noel: Redraw on home loan for shares?

I hear so much about compounding interest. Do you have an example of how I can start it working for my three young children?

An investment is said to compound when the earnings are left to grow and are not withdrawn as they are paid – this enables you to enjoy interest on interest. For young children the best example might be opening an online interest bearing account with one of the major financial institutions. As the interest is credited monthly they will be able to see for themselves how they are receiving interest each month on the accrued interest from previous months.

Can I use my home loan redraw to invest in shares? Is the interest attributed to that part of the loan tax deductible, and does it affect the CGT free status of my home?

You can certainly draw down on your home loan to invest in shares, and the interest on that separate loan would be tax deductible. It would have no effect on the capital gains tax exemption your residence currently enjoys. However, it’s important you do not get your non-deductible debt and your deductible debt intermingled. Therefore, for simplicity, I suggest the new investment loan be a separate loan – it could still be secured by a mortgage over your home.

I am asking about the ability to make concessional contributions up to $25,000 a year, in the year that one retires. Is the $25,000 still applicable or is it pro-rata? For example, $12,500 if you work six months of the financial year before retiring or $6250 if three months.

The limit for concessional contributions is $25,000 per person per year. To be eligible to contribute this amount you have to be under 65, or else pass the work test, which involves working 40 hours in 30 consecutive days in the year you make the contribution. There is no pro rata reduction in the cap if you don’t work a full year.

I know the $1.6 million limit affects the superannuation pension account if I am retired. But if I am still working, with a while to go before retirement and I am accumulating super, would the super fund tax the excess at 30 per cent if my super balance exceeds $1.6 million?

When you are in accumulation mode your super fund pays tax at 15 per cent on its income. When you are in pension mode there is zero tax on fund income. There is no penalty tax if your balance exceeds $1.6 million except that you are prohibited from making non-concessional contributions.

My father and mother are in a nursing home. My father has dementia and my mother has Alzheimer’s disease. They have separate rooms and dad has a RAD of $500,000 and mum a RAD of $225,000. They have $180,000 in the bank. They both receive a fortnightly pension of $907.60 and their nursing home fees are $50.16 per day plus a means-tested care fee of $1.19 per day.

When my mother passes away, with the RAD of $225,000 being returned to dad’s bank account what will this mean to his means-tested care fee?

My co-author and aged care guru Rachel Lane says: ‘‘Unfortunately many people don’t think about this until it happens. Their assessment assumes that their assets are split 50 per cent each, irrespective of the legal ownership.

Based on the figures you have provided, with the RADs paid in full, the means-tested care fee should be about $9 a day each. If your mum were to pre-decease your dad the question is where will his RAD be directed by his will? In the case of jointly owned assets, such as the bank account, assets pass based on survivorship. Many married couples have what I call ‘I love you’ wills whereby the assets of the deceased are automatically left to the surviving partner. But this can have unintended consequences.

If we assume that your dad receives all of your mum’s assets the effect will be twofold – his pension will reduce to around $753 per fortnight and his means-tested care fee will increase to $40 a day.’’

This scenario is a warning to all senior citizens of the importance of getting good advice sooner rather than later. The fees to a surviving partner may be able to be reduced if part of the deceased assets were bequeathed to the family and not left to the surviving partner. But it’s too late to do it once death has occurred.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.