My wife and I are retired, both aged 63. We own our home and a holiday house, which we could rent out if needed. We hold about $200,000 in shares and $100,000 in VicSuper. I am on a defined-benefit Emergency Services & State Super (ESSS) pension for life, paying $57,000 a year and, payable if I die, at about 70 per cent to my wife. I understand that, before I reach 65, the ESSS will offer a lump sum to replace the pension. In your opinion, how much would be a reasonable payout? My wife and I are both in good health and still playing competitive sport, so we may live into our 80s. My second question relates to about $5000 in ANZ shares I hold in trust for my three grandchildren, aged six, seven and eight, with dividends reinvested until their 21st birthdays. They are all enrolled in the ANZ Bonus Option Plan (BOP), not the Dividend Reinvestment Plan (DRP). Should I change them to the DRP plan for the best financial outcome? EC

The ANZ BOP allows you to select bonus shares instead of dividends.

The advantage is that you pay slightly less per share than if you bought them through a broker and do not receive any taxable income, nor franking credits.

However, your original cost base is lowered, resulting in a higher capital gain down the track.

By contrast, the DRP allows you to reinvest dividends to buy more shares, again at a slightly lower price than at market.

The dividend income is taxable and you claim franking credits, while the cost base of the new shares means you have a relatively lower capital gain when sold.

The children are unlikely to be in a high tax bracket at age 21 and a BOP means less income and thus less paperwork for you. Stick to the BOP but keep careful records.

To work out the commutation value of a lifetime pension, you need an actuary.

From what I have seen elsewhere, you could expect a payout figure about the equal to 10-13 years’ worth of pension payments. That said, I would suggest that since you are both healthy and can expect long lives in retirement, you do not take the lump sum.

The main reason the fund would urge you to consider it is that it is cheaper for the fund.

I have often said that a government-guaranteed, Consumer Price Indexed, lifetime, reversionary pension, paying far more than the age pension, is a gift, allowing you to sit back and watch the coconuts fall.

It has been recorded that people receiving lifetime pension or annuities live longer than average, possibly because they have a lot less to worry about.

My husband, aged 46, and I, aged 40, paid off our mortgage in 2019, with our home unit now worth about $700,000. While we enjoy being mortgage free, we are wondering what to do next from an investment perspective. We collectively have gross income of about $125,000 a year and, since paying off the mortgage, we have saved about $50,000 (we are prolific savers!) We each have about $160,000 in superannuation and I contribute an additional $100 a fortnight pre-tax. As the bank is paying minimal interest, we would like to look at the next steps and where to invest. SM

You should look at the two most important areas that affect your lifestyle.

In the short term, is your home unit of adequate size and in a good location? Would you be happier elsewhere? If so, look around to find a property that is more suitable.

Taking a long-term view, the Australian Super Funds’ Association estimates that a couple requires about $40,380 a year for a “modest” retirement and $61,909 for a “comfortable” retirement.

If you want to retire in 25 years’ time, these figures will have grown to about $84,500 and $129,600, respectively, if inflation compounds at 3 per cent a year.

If you want a “modest” retirement, you would need about $1.75 million in super producing untaxed income, assuming your pension fund earns 5 per cent a year and you index the pension at 2.5 per cent, that is, below the estimated inflation rate. To reach that figure, you each need to contribute about $8000 a year before tax, including employer contributions. Anything above that is a bonus.

Source: The Sydney Morning Herald