Homeowners vs renters in retirement, by the numbers Retired actuary John De Ravin explores the outlook for retirees who own their home and for those who rent. “
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our home is your castle”, according to the old saying, and Aussies really take that to heart, more than the residents of just about any other nation on earth.
Some of the advantages of home ownership are obvious. For one, if you own your home, you’re not at the mercy of a landlord who can turf you out, or increase the rent at the end of each lease period, so owning your home means security of tenure. Also, if you own your home, you can decorate and renovate it as you see fit without needing to seek anyone’s permission. And there’s that indefinable feeling of attachment to a piece of physical earth, and a building, that brings comfort. But apart from those advantages, there are two benefits of home ownership that are distinctive to Australia. First, your ‘principal residence’ is an important exemption from our capital gains tax (CGT). Even if you sell your home for twice, five times, or even 10 times what you paid for it, you won’t normally pay a cent in CGT. The CGT exemption contributes to home ownership being a great investment. But the other thing, which is especially relevant for retirees and pre-retirees who hope to receive a part or full Age Pension, is that the Age Pension means testing arrangements in Australia are very generous to homeowners. In fact, regardless of how valuable your home may be, it isn’t counted in the assets test. You can own a $5 million home and, as far as Centrelink is concerned, that asset is worth precisely $0 when it comes to the assets test.
Case study: Bill and Mary Bill and Mary are 66. They are both recently retired. Because Bill’s employment involved many relocations, they never bought their own home. However, they have lived modestly and contributed to super, so they have built a decent financial asset base of $850,000, entirely in superannuation. Now that Bill and Mary are no longer employed, they want to settle down and stay in one place for many years, near their children and grandchildren. They are trying to decide whether to rent or buy. 14
Let’s compare their situation according to whether they decide to buy or rent. The table below shows their income and expenses if they rent, compared to if they buy a property for $600,000, leaving $250,000 with which to take out account-based pensions. Item of income or expenditure
BUY
RENT
Income from account-based pension
$12,500 $42,500
Age Pension
$36,582 $16,692
Rental Assistance TOTAL INCOME Rent
$0
$3380
$49,082 $62,572 $0 $24,000
Other property expenses (rates, insurance)
$3000
TOTAL PROPERTY EXPENSE
$3000 $24,000
NET INCOME TO SUPPORT LIFESTYLE
$0
$46,082 $38,572
To prepare the table, it’s necessary to make some assumptions about the rent they would pay to live in a $600,000 property equivalent to the property they are thinking of buying. I’ve assumed they would pay an annual rental of four per cent of the property value. I’ve assumed that if they own their own home, they will have to pay annual rates and buildings insurance of $3000 that they would not have to pay if they choose to rent. And finally, the table assumes that whether they take out an account-based pension with $850,000 (if they rent) or $250,000 (if they buy a home), they will draw down on their account-based pension prudently at the statutory minimum rate of five per cent per annum (as many Australian retirees do). The Age Pension entitlements in the table assume they own $10,000 in non-financial assets as well as their financial assets. So, you can see that Bill and Mary are much better off if they own a home. The main reason is that they get much more Age Pension if their assets are in their home (where they don’t count against the assets test) than if all their assets are held in their account-based pensions (where their assets are fully asset testable). Effectively, Bill and Mary will
YourLifeChoices Retirement Affordability Index™ March 2020
