Using your own money for an investment property is probably the best way to go, writes George Cochrane.

MY HUSBAND and I are at loggerheads over the following issue and hope you can assist us. We are in our late 40s, mortgage free but with two children, one at uni and one hoping to go in the next couple of years. We are in the process of purchasing a coastal block of land as an investment but might build on it closer to retirement. As we have the money, I wish to purchase the block outright and sit on it as an investment. My husband, on the other hand, believes we should not use our own money. His argument is that money is cheap to borrow and we should never use all of our own money to purchase something. R.O.

I think I'd back the wife here! If you borrow the money, then, mathematically, you'd be paying about 7 per cent a year before tax deductions and, to break even, would have to earn 7 per cent before tax if you invested it elsewhere. You could do that with some three- to five-year term deposits but there's little point in breaking even; you would want a reasonably positive return for your efforts. The sharemarket is a little shaky and I doubt that inexperienced investors should be gearing themselves into that right now. Another aspect is the risk of having a loan if anything goes wrong with either of you, your lender or the asset itself.

Your husband would be correct if you could find an investment that pays significantly more than the cost of your loan but, for now, I'd say avoid borrowing. If a good investment does come up later, you can always borrow against the property.

Death benefit options

WE ARE in our early 50s and have two children, aged 13 and 16. My husband has been recently diagnosed with bowel cancer and given a pessimistic prognosis. We are both on salaries of $70,000. I have few assets and little super but my husband owns our family home outright, has more than $300,000 in a self-managed super fund and more than $150,000 in stocks and shares. Our children attend private schools. Their education and welfare are our primary concerns. Currently, I am named sole beneficiary of my husband's estate and super fund. Would there be tax advantages to leaving a portion of the estate directly to the children? F.G.

Yes, but there may be a better option. You are correct in that, where children under 18 earn income from money received through a bequest, they are taxed as adults (the first $6000 is tax-free and the next $29,000 of income is taxed at 16.5 per cent). So one option is to leave the $150,000 in shares to the children by adjusting the will so that the share portfolio is placed into a testamentary trust. CGT is payable as the shares are progressively sold off but franking credits should reduce their tax liability. You'll need to see a lawyer.

This would undoubtedly have a better result than bequeathing the non-super money to you alone since your salary already places you in the 31.5 per cent tax bracket. Where shares are transferred on death, there is no capital gains tax until the shares are sold, although CGT is then payable on the gain (post-1985 shares) since their original purchase.

If the children have five and two years, respectively, left at school at, say, about $29,000 a year each, you're looking at total costs of about $200,000.

So a second option is to arrange for, say, $180,000 of the super benefit to be left to the children in the form of superannuation death benefit pensions, which will be taxed at adult rates but carry a 15 per cent tax offset. Your husband can establish a binding death benefit to arrange for this. Each fund will have to be cashed in if any money remains by age 25 but I suspect it will have been spent by then.

Another factor to be aware of is that, if your husband's condition becomes terminal, this becomes a "condition of release" for preserved super benefits and he can withdraw it all as a non-assessable benefit.

Given that you have little super, I would prefer that you arrange to take your share of the super as a lump sum death benefit and place it as a non-concessional contribution into a super fund to help provide for your own retirement.

You haven't mentioned life cover and it is a good lesson to other readers that, when you have dependant children and/or a mortgage, you should always carry a hefty amount of life insurance cover.

You should be rushing out to seek professional advice to evaluate your options.

Super funds dilemma

ALL the advice I see concerning changing superannuation funds if you feel yours is not performing well is aimed at working contributors and constantly emphasises "the long term". But what if you are retired, like me, and drawing a monthly income from an allocated pension administered by a once outstanding fund that has suddenly been placed on the "worst performers" list? Do I stick with it (do I have any choice?) or do I transfer to another fund? T.J.

Yes, you have the choice to rollover to another fund but before doing anything it's worth finding out the core of the problem. If it's endemic - that is, bad management, same people - then, yes, perhaps you should consider moving. If the drop in performance was due to, say, the presence of unlisted assets, the question to be asked is: are there any more falls in valuations of unlisted assets to be expected? I doubt that one could get an answer.

Personally, I see problems when a fund invests large percentages in unlisted assets because the latter are, by their nature, illiquid and difficult to value, especially at a time when listed assets have already tumbled in value. But your fund's unlisted asset may have a year or two until its next scheduled valuation. Those are chickens that inevitably come home to roost, perhaps not in the short term but eventually in the long term.
That's why unlisted property trusts, once so popular, have largely disappeared from the investment landscape.

Throughout history, the forces behind a major change may take a long time to build up but, when the change does come, it tends to be in the form of an avalanche rather than a glacier.