My question regards passing super tax-free to children. I am 74 years old and previously had no super but I have just sold about half of my share portfolio to put the proceeds into super. I am not sure I have done the right thing as the capital gains tax (CGT) still has to be determined and I may be up for a substantial tax bill. With my super I have opted to have an allocated pension. However, I have retained some blue ribbon shares I have owned for 10 years and I was unaware that shares can be passed on to children CGT-free. Does that mean upon my death or does it mean at any time, such as now? Does that mean "small children" as in grandchildren, or my own children, who are now adults? J.S.

You provide a good warning to others - don't sell shares to place the money into a super fund until you know what the CGT bill will be. With the 30 per cent tax bracket now extending as high as $75,000 in 2007-08 and $80,000 in 2008-09, any shares paying fully franked dividends are effectively tax-free. In order to pass shares in your name to your grandchildren (or anybody) without having to pay CGT (until they sell), unfortunately you have to die first, which tends to put a bit of a dampener on the idea.

Pay separate pension

Both you and Daryl Dixon recommend moving money from the accumulation account to the pension account each financial year to maximise the tax-free component. Two accountants (Bell Partners and DeLoitte) have advised me this is not possible. Who is correct? R.B.

The rules don't allow one to add to a super fund already paying a pension. I'm sure that, if you read the recommendations, you are being advised to either begin paying a separate pension with the contributions newly made to an accumulation account or else commuting the original pension back into the accumulation phase, adding the new contributions, and beginning a fresh pension. It's bureaucratically silly because contributions are a form of fund income for super funds, as is investment income. The latter can continue in the pension phase but the former cannot.

To explain to other readers, the advice is based on the fact that if you make a contribution without claiming a tax deduction (non-concessional) it falls into the tax-free component (and won't be taxed if it ends up in the estate). When the fund is in the accumulation phase, any growth falls into the taxable component but, if in the pension phase, the component ratio is frozen and a fund with 100 per cent tax-free component will remain so.

Sorry, wrong option

I have had a substantial amount in an allocated pension for about six months. I have just received the annual statement and noticed that the supposedly "safest" investment choice, diversified fixed interest, in fact lost $186 in about $236,000 invested in that option. Now I am somewhat confused (and annoyed) since my understanding is that fixed interest is precisely that. I consider the term highly misleading, even immoral and unethical. Can you explain please? I.H.

You are right. It is partly misnamed and certainly confusing but you should have been advised that volatility is inevitable. I generally explain it like this. Suppose you want to buy a government bond with $1000. You'll find that NSW Treasury Corp is currently offering a five-year bond, maturing in September 2013, paying a coupon interest of 6.4 per cent. This coupon rate represents a fixed interest rate; ie, you will be paid a fixed amount (unlike share dividends, which can vary) of $64 a year, paid half-yearly, while you hold the bond and in 2013 you are guaranteed to receive your $1000 back. And it carries the highest credit rating.

However, while the interest is fixed for five years, the price is only fixed on the first day of issue and on maturity.

Let's say that, in three years' time, interest rates have risen and new bonds are on offer paying 10 per cent a year. Desperate for cash to pay for your daughter's wedding, you offer to sell the bond to your son, asking $1000 because you believe it to be a fixed security.

Your son, part-way through his B.Comm, smartly replies: "Why would I give you $1000 for a bond paying $64 a year for the next two years when I can spend $1000 and get $100 a year in interest for the next five years? It's fixed interest, not capital guaranteed, dad. I'll give you $800!" (whereupon you threaten to delete him from your will, which should work).

What he has taught you is that the value of a fixed interest security varies daily (and hourly), depending on the current interest rate or yield, the fixed coupon rate, the time to maturity and the time until the next interest payment (the full bond-pricing formula is on the Reserve Bank's website, http://www.rba.gov.au).

Your fixed interest fund is required to price its investments daily in order to come up with a daily unit price. As a rule of thumb the value of a fixed interest portfolio will rise when yields fall and vice versa. Unfortunately you have invested in a fixed interest fund at a time when a) interest rates are rising and b) long-term interest rates are below cash rates. It may offer low volatility but it won't offer a high return for some time. If you wanted price stability and a high return you would have done better to stick with a bank term deposit or high-yielding bank cash account such as banks' internet savings accounts, which are paying more than 6 per cent.