Harness compound growth for investment

I have read your recent articles about the miracle of compound interest, but I am not from a finance background and didn't understand the methods you propose in regards to investing. Is one strategy to withdraw some of your earnings and start a separate investment plan?

The essence of compounding is that the earnings on the investment are reinvested, instead of being withdrawn. This happens automatically if there is capital growth in assets such as property and shares. With shares it may be possible to sign up for a dividend reinvestment plan, but obviously if you own property you can't reinvest the rents in the property. However, you could invest the rent proceeds into a bank account or into share-based investments, as you mention. The whole point of compounding is that you retain both the growth and the income and don't spend it. This should provide you with a pool of capital that will grow faster and faster as time goes by.

I am 69 and in very poor health and my husband is 72. We are both retired. I have an accumulation account with a super fund - my husband has no super. When I die, my money in super will go to my husband. Does he have to pay any tax on it when he gets it?

There is no death tax on superannuation left to a dependant - a spouse is always classified as a dependant for superannuation purposes. I wonder why at the age of 69 your superannuation is still in accumulation mode - if it were in pension mode the fund would be a tax-free fund, but in accumulation mode the fund pays 15 per cent tax. Maybe it would be worthwhile to seek advice.

I am 82, my wife is 79 and we own our unit. We have about $350,000 in super. We also have $5000 in the bank, a car, and furniture worth about $10,000. My wife draws a pension of $20,000 a year, and I draw $40,000 a year. We are receiving $470 each a fortnight from Centrelink. We are income tested. Is there any way we can increase our pensions?

The only way to increase your pension is to reduce your assets as the deeming provisions on them are acting to give you a lower pension. In view of your ages, I would simply draw what you need from your superannuation secure in the knowledge that your pension will start increasing as your assets drop.

I have an account-based pension from which I receive a monthly payment. I am wondering whether it is more advantageous to nominate the payment to be made either every three months or even six months? This way it would stay in the account longer and accumulate a greater return.

What you say makes sense - unless you have a fund that is heavily biased towards shares. If that is the case, a sudden downturn may be more harmful to you if you had to withdraw six months' worth of payments in one lump sum.

My wife, 57, is on Newstart but exempt from looking for work due to a medical condition. I am aged 61, am her full-time carer, and receive carer's payments. Our assets are our home, $30,000 in a savings account, and a car and furniture. Our son is in financial trouble and needs $200,000 to get out of it. If I withdrew that amount from my super, which is in accumulation phase, and gave it to him would it affect our payments?

A gift of $200,000 from a currently exempt asset may have a huge effect on your income payments. A departmental spokesperson explains that our social security system is based on the principle that people should use their own income and assets to help meet their day-to-day needs before calling on the community for income support.

While people are free to make gifts to their families, charities and other organisations, where significant gifts are involved, the social security income and assets tests will take this into account under gifting rules.

Gifting rules apply to assessable assets (such as financial investments) as well as exempt assets (such as superannuation held by a recipient under age pension age).

Under the gifting rules, a person can give away up to $10,000 in a single year or $30,000 over a five???year period before the gifting rules apply. Any amount that is given away above either of these amounts is treated as a "deprived asset". It is assessed to earn income under the income test deeming rules, like financial assets, and counted as an asset for five years from the date of the gift.

It is vital that anybody considering gifting take advice before the deed is done.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature. Readers should seek their own professional advice before making decisions. Twitter: @noelwhittaker

This story Harness compound growth for investment first appeared on The Sydney Morning Herald.