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Dear Aussie Advisor, I'm unemployed. Should I renovate my house?

Brendan Gow
·Contributor
·6-min read
(Source: Getty)
(Source: Getty)

My husband and I are currently unemployed. My husband recently took a separation pay from the university, and we now have around $100,000 in the bank.

My husband approaches his preservation age of 58 in January 2021, with at least $1.2 million in super. He also has Social Security money in the US, circa the amount of US $300,000.

My preservation age is 60, which will be in 2028, and I currently have around $300,000 in super.

We have one dependent, aged 15 (custody and financial responsibilities shared with another household), currently in Year 10. Our household pays school fees around $20,000 per annum.

We have three mortgages for two homes; one owner occupied, and the other is an investment. We currently owe around $1.7 million for both properties from one lender, and repayments for all three mortgages were deferred until September 2020.

The investment property currently earns reduced rent at $500 per week due to Covid-19. The normal rent was $700 per week.

We are planning to withdraw around $200,000 tax-free from my husband’s super next year when he reaches preservation age to finance our planned renovation ($300,000) in our owner-occupied home.

If my husband does not get employed after the mortgage’s deferral expire, we’re planning to withdraw mortgage repayments from our superannuation.

Questions:

1. Do you think it is a good idea to go ahead with our planned $300,000 renovation?

2. Do you have any scenarios applicable to us that may guide us in handling our finances? Or any other advice you may provide us?

Glory

Hi Glory,

Thanks for your letter. Covid has certainly changed our plans, hasn’t it?

Unfortunately, as the information shared is quite topline, there is some detail missing that would be of value in terms of shaping my response, such as the value of your home and investment property. However, let’s take a general approach to your questions, and how they relate to some of your plans.

First, a few questions

Understandably, the following has been explored on an assumptive level. My primary questions are:

  1. Will your husband return to work given the opportunity?

  2. Does your husband have an alternative opportunity to withdraw his super tax free?

As your husband reaches his preservation age at 58, you note he plans to access super for repayments if he is not re-employed by this age. Accessing your super at your preservation age, but before age 60, is possible, as you would have met a condition of release. Note, you can only access a maximum of 10 per cent per annum.

Some things to consider

You also said that your husband has a US Social Security Pension. Does this mean he is a US citizen? This is important for tax reasons, as US citizens tend to have a very unfavourable tax scenario globally, meaning your husband will need to be cautious in his investment choices, and how much he gains from these investments.

Investing in what is called ‘passive foreign income companies’ can lead to tax penalties with the IRS in the US.

You have mentioned in your letter that the withdrawals from super would be ‘tax-free’, It is important to remember that, despite being over your preservation age, if you are under 60, the tax-free access age, and access your super, there will still be some tax in drawing funds.

Depending on how much your husband has salary sacrificed, how much was paid by his employer as super guarantee and how much is ‘non-concessional’ contributions, you may want to chat more in depth around this with your financial advisor to establish your best options.

More from The Aussie Advisor:

With regards to your investment property, whilst I understand it is currently leased at a reduced rate, I presume it will revert to $700 per week based on your negotiation in the coming months. As such, this amount should continue to provide you with a steady income into retirement.

Whilst many people took up the banks mortgage deferral offers to ensure safety and security during the uncertainty of 2020, I have made the assumption that, as your husband took separation pay from his role and you made the decision to defer mortgage repayments, you are on a budget at current to better establish yourself in these times.

Similarly, I understand you need to ensure the costs to educate your dependent are covered for the final two years of school.

The bottom line

As advisors, we don’t tend to give too much direction when it comes to personal costs, such as the renovations to your home.

However, as your husband is reaching his preservation age of 58, affording him to draw a lump sum from super but with associated tax costs, I would suggest holding off from this expense until after he turns 60.

You are then able to draw the funds from super tax-free to fund the project. Alternatively, should your husband reach his preservation age whilst continuing to work, you may like to explore a strategy called a Transition to Retirement, which could help to add slightly more to super in retirement.

Feel free to reach out to myself or your financial advisor for further details, as it is a tailored approach.

As your husband’s preservation age isn’t until January next year, this will afford you some time to see how 2020 wraps up for you both, including rental income returns, before making any decisions.

I would urge you to consider doing whatever places the least amount of strain on your current daily expenditure.

Whilst you’ve both seemingly worked hard to develop a good financial position, you don’t want to set yourself back if taking your time and waiting a few years could have put you in a better position.

  • Got a question for the Aussie Advisor? Email them through to yahoo.finance.au@verizonmedia.com and we’ll pass it on.

Brendan Gow, an authorised representative (no. 427470) of Shaw and Partners Limited AFSL236048 (the “Aussie Advisor”). This article has been prepared without taking into consideration any investor's financial situations, objectives or needs. Accordingly, before acting on the advice in this article, if any, you should consider its appropriateness to your financial situation, objectives and needs. Every reasonable effort has been made to ensure the information provided is correct, but we cannot make any representation nor warranty as to the accuracy, completeness or currency of that information. To the extent permissible by law, no responsibility for any errors or misstatements is taken, negligent or otherwise. Shaw or its authorised representatives may also receive fees or brokerage from dealing in financial products, see Shaw’s Financial Services Guide for information about the services offered by Shaw available at http://www.shawandpartners.com.au/.

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