ISSUE 17 MaY 2021
Retirement Affordability Index
™
Why retirees need to learn to ‘eat the house’ Our experts explain the strategies that can deliver a cash boost – and which are right for you – and whether the house and the Age Pension are on a collision course. www.yourlifechoices.com.au
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Contents
Published by: YourLifeChoices Pty Ltd Publisher: Leon Della Bosca Editor: Janelle Ward Copy Editor: Dairne John Writers: Dr Deborah Ralston, Jeremy Cooper, Matt Grudnoff, John De Ravin, Janelle Ward, Ben Hocking Cover Design: Leon Della Bosca Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9081 9997 All rights reserved, no parts of this book may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise, without the permission in writing from the publisher, with the exception of short extractions for review purposes. IMPORTANT DISCLAIMER No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor. Copyright: YourLifeChoices Pty Ltd 2021
A legacy or a better retirement? Dr Deborah Ralston tells how retirees can achieve a more comfortable lifestyle
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Costs that drove inflation increase March quarter costs that hurt and those that delighted
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Should retirees be forced to ‘eat the house’? Australian Institute economist Matt Grudnoff on whether the home should be part of the pension assets test
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Invest in your home to boost your Age Pension Challenger’s chairman of retirement income Jeremy Cooper reveals the added bonus of home improvements Can the Pension Loans Scheme give you peace of mind? We explain the scheme, the criticism and the government’s defence
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Cashing in the ‘castle’ to provide extra funds 14 Retired actuary John De Ravin explains reverse mortgages and equity release schemes How homeowners can boost their super Could the downsizer contribution ease your nest egg concerns?
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Home truths Members have their say on the family home and the pension assets test
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Government update 20 Age Pension updates, superannuation changes, tax time tactics and more
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Shift the focus from a legacy to a better retirement Dr Deborah Ralston, a member of the federal government’s Retirement Income Review panel, explains how retirees can access a more comfortable and confident lifestyle.
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espite the negative sentiment towards baby boomers and their fortunate position in life – unlike younger generations – the majority retiring now will have only relatively modest super balances. This is due to the fact that the superannuation guarantee (SG) was introduced at only 3 per cent in 1992 and did not reach 9 per cent until 2012. Most retirees have not contributed at higher levels throughout their working lives. Where the boomers win, however, is in the value of the family home. Older generations have had the benefit of rising property values over recent decades, with the consequence that a large proportion of their wealth is in the family home.
What the Retirement Income Review uncovered about the importance of the family home This issue was covered in some depth in the Retirement Income Review (RIR). In examining the three pillars of the Australian retirement system – the Age Pension, compulsory superannuation and private savings – the review pointed out that: “The home is the most important component of voluntary savings and is an important factor influencing retirement outcomes and how people feel about retirement. Homeowners have lower housing costs and an asset that can be drawn on in retirement.” At present, about 80 per cent of retirees are homeowners. This is a particularly high rate of homeownership by international standards that not only benefits individuals but the wider economy. Homeownership lowers age pensioners’ living expenses and means that the system is very cost effective for Australian taxpayers. At 2.4 per cent of GDP, Australia has one of the lowest cost public pensions systems in the OECD. For most Australians the family home is not only of huge personal and psychological importance, but it is also a major store of wealth. As housing is exempt from the Age Pension assets test and capital gains 4
tax, for many it is a preferred form of retirement savings. At present, around 15 per cent of age pensioners live in homes valued at more than $1 million, although the vast majority of these are in Sydney or Melbourne where property prices have escalated in recent years. Many retirees in this situation may be termed ‘asset rich and income poor’.
The family home is a store of wealth that can be used With the family home constituting such a large component of private saving, it is likely that an increasing number of retirees will draw on this precious asset to improve standards of living in retirement, provide additional resources for those wishing to age at home, or as a way to pay out the remaining mortgage at retirement.
Government schemes There are two government measures that encourage retirees to access the value of their home – the Pension Loans Scheme and the downsizer contribution. The Pension Loans Scheme (PLS) is effectively a reverse mortgage for age pensioners and selffunded retirees, designed to supplement retirement income up to 1.5 times the maximum Age Pension per fortnight. There are no regular repayments through the life of the loan, and income from the scheme is not assessable in the Age Pension means test. It is not possible, however, to borrow a lump sum under the PLS. The impact on the capital value of the property is less than you might think. While interest rates are higher for reverse mortgages because there are no regular repayments, the net interest cost after allowing for some increase in property value, is quite modest. The RIR gives an example of a retiree who draws $5000 each year throughout retirement against equity in a home worth $500,000. By the time the retiree is 92, the property has an accumulated debt of only around a quarter of its value.
YourLifeChoices Retirement Affordability Index™ May 2021
The downsizer contribution allows people aged over 65 to enhance retirement incomes by increasing super balances on selling the family home. Provided the home was held for at least 10 years prior to sale, a person can contribute up to $300,000 to superannuation from the proceeds. This could mean a combined $600,000 boost to superannuation balances for a couple.
Private sector schemes In the current economic environment, a variety of new forms of private sector home equity access products are attracting more interest from both age pensioners and self-funded retirees. These include reverse mortgages, home reversion or equity release products. Each is slightly different, as discussed on ASIC’s Moneysmart website. Private sector reverse mortgages offer the choice of income stream, line of credit, lump sum or a combination of these. A lump sum could be used for purposes such as paying out a mortgage at retirement, covering the cost of large expenses such as home renovations, assisting younger members of the family with a home deposit or education expenses, or providing additional resources for inhome or residential aged care. For an increasing proportion of older Australians with mortgage debt at retirement, refinancing with a specialist reverse mortgage provider is an attractive option. Loan repayments can be drawn against equity in the home instead of being repaid in cash, thereby preserving superannuation balances for retirement income. Importantly, unlike a regular home loan, a reverse mortgage does not require regular repayments and a borrower cannot default for missing payments.
Prior to 2012, reverse mortgages were not subject to product specific legislation and were regulated at the state level resulting in highly variable customer experiences and product designs that generated unexpected outcomes for customers and misaligned selling practices. However since 2012, federal legislation has provided significant consumer protections, limiting loan-to-value ratios, guaranteeing occupancy and ensuring people cannot have negative equity in their homes. There are fairly strict limits on what you can borrow against the home, starting at 20 per cent of equity at age 60 and increasing by 1 per cent with each year of age. These measures ensure in all but the most extreme economic scenarios, homeowners can expect to own a majority of their home equity by the time they reach 90 years of age. Home reversion is a property transaction rather than a loan, where you agree to sell a portion of your property to a provider or investor in return for a lump sum payment. Any future growth in property value is shared, based on the percentages of ownership. The home reversion provider pays a ‘discounted’ amount for the share of equity, which can be much lower than the current market value. For example, you could sell 50 per cent of the future value of your home, but only receive somewhere between 25 per cent and 40 per cent of the value up-front, depending on your age. Home reversion is not subject to the same protections as a reverse mortgage under the National Credit Consumer Protection Acts (NCCP). There may also be limited availability based on location for this product compared to a reverse mortgage.
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Not so well known are equity release contracts, where you can sell a portion of your home to one or more investors, in return for a lump sum or a regular income stream. All maintenance, repairs and insurance costs are shared between the owner and the investors. Every five years, an additional small part of equity is used to pay a notional rent to the investor as return on their investment. While the owner retains the title of the property and the right to continue living there, they may also choose to rent the property out and retain all the rental income.
financially responsible and do not want to be a financial burden on others. But often, this approach means that savings intended for retirement funding, including capital, go unspent and create an unintended bequest for future generations.
Each equity access product has different features that may or may not suit an individual retiree’s needs. Everybody’s circumstances are different. As the Moneysmart website points out, it is essential to get independent advice regarding how such a transaction might affect your Age Pension entitlements, bequests, etc. There is also a fact sheet from Service Australia to assist.
next generation. By all means leave a bequest, but ensure that this is not at the expense of living well yourself. Drawing equity in the home to ensure you can enjoy your retirement with both adequate housing and funding is another example of using retirement savings well.
As the RIR points out, in each decade of retirement we spend less. Concerns about providing for future costs are largely unfounded, as in this country we enjoy a generous system of ‘social transfers in kind’. These are benefits in terms of the health and aged care systems, tax concessions such as SAPTO With equity release products, you need to keep [Seniors and Pensioners Tax Offset], social security track of your borrowed portion. Geographic benefits such as the carer’s pension, and discounted restrictions do not apply, so equity state and local government services release can occur anywhere such as concessional pricing for The purpose of the provided property investors public transport, discounted utilities, can be found. These may be government encouraging car registration and council rates. family or friends, self-managed In many ways these transfers and supporting superannuation funds or unrelated represent a fourth pillar of the parties. retirement saving is to retirement system and they are not A little known but valuable feature ensure that people can insignificant. Indeed, the RIR found that the average value of such of an equity release product is that live well in retirement, benefits is greater than the full Age they also qualify for the tax-free Pension for people over 65. downsizer contribution allowance, not save for the next allowing retirees to stay in their The purpose of the government generation. home but contribute funds from the encouraging and supporting sale of a portion of their equity into retirement saving is to ensure that their superannuation accounts. people can live well in retirement, not save for the
What is the efficient use of retirement savings? Throughout the RIR there are references to the efficient use of retirement savings – that is using retirement savings to provide needed funding in the form of both income and capital. This statement has often been misinterpreted to mean that retirees should reach the end of their lives with all retirement savings exhausted, but that is not the case. It is pointing to the fact that once people reach retirement, they often become very cautious about spending down their retirement savings. Many live frugally in the belief they should preserve the capital they have saved, spending only returns and dividends, and with a concern that they will ‘run out of money’ before they die. This approach is well motivated in that people feel they are being 6
Conclusion For most people, staying in their home and community is an important priority in later life. The additional income that can be generated from the wealth stored in the family home can ensure a higher standard of living in retirement and is especially important for those who have not had the benefit of higher superannuation contribution levels for much of their working lives. Dr Deborah Ralston is a Professorial Fellow at Monash University, where she is a member of the steering committee for the Mercer CPA Global Pension Index. She is a member of the Reserve Bank of Australia Payments System Board and holds a number of non-executive director roles. In 2019, she was appointed by Treasurer Josh Frydenberg to the three-member panel for the Retirement Income Review. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
YourLifeChoices Retirement Affordability Index™ May 2021
Spike in fuel costs drives cost-of-living increase T he Consumer Price Index (CPI) rose 0.6 per cent in the March quarter, with higher fuel prices, compared to the low prices in 2020, accounting for much of the rise.
A rise in prices for accessories (+7.3 per cent) reflected high consumer confidence and demand for discretionary items such as jewellery, allowing jewellers to pass through elevated input costs.
The most significant rises were automotive fuel (+8.7 per cent), medical and hospital services (+1.5 per cent) and pharmaceutical products (+5.3 per cent) due to the resetting of the Medicare and Pharmaceutical Benefits Scheme (PBS) safety nets.
The CPI rose in all eight capital cities, ranging from 0.3 per cent in Melbourne to 1.4 per cent in Perth and 2.6 per cent in Darwin.
This had the biggest impact on constrained couples (+0.8 per cent), who spend a bigger proportion of their income on transport and medical care, mainly through private health insurance. Constrained singles and well-off couples and singles (+0.6 per cent) were also affected. Cash-strapped couples (+0.5 per cent) and singles (+0.4 per cent) were least affected as they tend to travel less and cannot afford private medical care.
Weekly expenditure for retirees aged 54+ Expenditure items Housing As a percentage of expenditure Domestic fuel & power As a percentage of expenditure Food & non-alcoholic beverages As a percentage of expenditure Alcoholic beverages & tobacco products As a percentage of expenditure Clothing and footwear As a percentage of expenditure Household furnishings & equipment As a percentage of expenditure Household services & operation As a percentage of expenditure Medical & health care As a percentage of expenditure Transport As a percentage of expenditure Communication As a percentage of expenditure Recreation As a percentage of expenditure Education As a percentage of expenditure Personal care As a percentage of expenditure Miscellaneous goods & services As a percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure
Well-off couples
BIS Oxford Economics chief economist Dr Sarah Hunter said she expected inflation to accelerate sharply in the June quarter – above 3 per cent – for reasons including childcare costs, a further rise in average fuel prices, lifts in the cost of some insurance products and upward pressure on new dwelling costs as a result of commodity and labour shortages in the sector. “Notwithstanding these one-off factors, core inflation is likely to remain weak for some time,” she said.
Constrained couples
Couple Couple homeowners homeowners with private on Age income Pension $183.60 $108.51 12% 13% $42.02 $31.56 3% 4% $249.51 $175.74 17% 20% (-1%) $57.20 $31.08 4% 4% $30.81 $17.49 2% 2% $75.79 $32.88 5% 4% $43.55 $30.81 3% 4% $153.82 $109.64 10% 13% $195.43 $126.86 13% 15% (+1%) $34.34 $24.34 2% 3% $301.25 $102.30 20% 12% $0.62 $0.22 0% 0% $29.75 $18.06 2% 2% $90.78 $48.96 6% 6% $1,488.47 $858.44 +$9.48* +$6.72* $6,450.02 $3,719.90 +$41.07* +$29.10* $77,400.21 $44,638.79 +$492.83* +$349.13*
*Percentage and dollar changes compared with December quarter figures
Cashstrapped couples Couple who rent on Age Pension $205.51 28% (-1%) $33.31 5% $158.90 22% $50.51 7% $9.25 1% $20.01 3% $16.64 2% $37.96 5% $60.32 8% $26.34 4% $66.52 9% $0 0% $12.55 2% $24.48 3% $722.30 +$3.35* $3,129.96 +$14.51* $37,559.56 +$174.10*
Well-off singles
Constrained singles
Cashstrapped singles
Single Single Single who homeowner homeowner rents on Age with private on Age Pension income Pension $123.36 $91.05 $161.91 15% 19% 36% $30.39 $27.20 $23.09 4% 6% 5% $125.35 $88.11 $78.96 15% 19% 17% $30.70 $18.23 $25.58 4% 4% 6% $20.50 $8.89 $7.33 2% 2% 2% $41.47 $19.26 $15.36 5% 4% 3% $39.29 $22.20 $11.80 5% 5% 3% $88.32 $39.11 $23.14 10% 8% 5% $103.52 $52.80 $35.61 12% 11% 8% $33.24 $17.16 $13.39 4% 4% 3% $140.31 $52.78 $31.85 17% 11% 7% $0.13 $0.12 $0.01 0% 0% 0% $18.53 $9.78 $8.67 2% 2% 2% $55.10 $26.82 $16.71 6% (-1%) 6% 4% $850.22 $473.50 $453.40 +$5.30* +$2.73* +$1.82* $3,684.29 $2,051.81 $1,964.72 +$22.98* +$11.81* +$7.88* $44,211.45 $24,621.76 $23,576.70 +$275.67* +$141.75* +$94.68*
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Should retirees be forced to ‘eat the house’? Australia Institute senior economist Matt Grudnoff gives his view on whether the home should be part of the assets test for the Age Pension.
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hould retirees be forced to use the value of their home to fund their retirement? This is not an easy question to answer but it comes down to whether we think homes are investment goods or a part of the Australian dream. Prime Minister Robert Menzies (1939-41 and 1949-66) was keen to increase the rate of home ownership in the post World War II era. He was concerned about growing unrest, particularly among young people, and thought that housing was a way of getting people to invest in where they lived. You were less likely to riot in your neighbourhood if you owned a slice of it.
But home ownership rates are falling. An increasing number of families are finding themselves locked out of owning their home. This has been driven by rapidly increasing house prices as a new source of demand has rushed into the market – investors.
The tactic was successful and ownership rates soared.
Investors are driving down the rates of home ownership. More people buying investment properties means more people are renting. The only way this could not be the case is if rental properties are left empty because they are unable to find tenants. Many of those who are renting would prefer to be owneroccupiers. Increasingly, more people are feeling left out of the housing market. More rental properties mean more people are unable to live in their own home.
Home ownership became part of the Australian dream. Our retirement income system is built on the idea that you own your home. Those who are unfortunate enough not to own their home in retirement are far more likely to be in financial stress and poverty. In this context, it seems ridiculous to include the family home in the Age Pension assets test. After all, it’s an essential part of retirement.
Since the early 2000s, housing has increasingly been seen as an investment good; a vehicle to grow your nest egg; a tool for wealth creation. While the Liberals of the Menzies era wanted us to be homeowners, Liberals today want us to be landlords. In the late 1990s, the Howard government introduced the capital gains tax discount, which made investing in housing more tax effective.
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YourLifeChoices Retirement Affordability Index™ May 2021
But if houses are now just a way to grow your wealth, why should they be treated any differently to any other asset when it comes to the Age Pension? Investment properties are treated differently in the Age Pension assets test. Only the family home is exempt. But having set off down the road of seeing housing as an asset that can make money, and away from seeing it as a place to raise a family, it’s not surprising that there are increasing calls to treat it like any other asset. And if we also accept that a growing section of society is going to be locked out of home ownership, permanently, then are we accepting the likelihood of more poverty in retirement? Or will we need to fundamentally change how the Age Pension is paid to those who rent? This brings us back to retirees having to ‘eat the house’.
Older people were worried, but I also had many conversations with younger people who were trying to get into the housing market and were genuinely excited by the idea that house prices might fall enough so they could get into the market. They were happy to see the whole housing market burn if it gave them a chance to buy a home. Housing can be special. It can be considered an essential part of retirement and, therefore, excluded from the pension assets test. But not if we want to hand out big tax advantages to investors. Not if we want to see house prices continue to rise much faster than wages. Rein in tax concessions and slow house price increases or make pensioners eat the house. The choice is up to us.
Mood of the meeting
If we are paying more to retirees who rent, the funds will inevitably have to come from somewhere. It could come from a tightening of eligibility for the Age Pension by including the family home in the assets test. If this all seems odd, it is, probably because we never had a conversation about this change in our attitude to housing. It has crept up on us. Suddenly we are trying to think of housing as both an asset and a part of the Australian dream. This split thinking has led to some very divided opinions. When the recession first struck in early 2020, there was much talk about house prices falling. At the time, I was struck by the different reactions people had to this.
A YourLifeChoices Flash Poll, Should the family home be part of the assets test?, drew a strong response, with an overwhelming 85 per cent of the 2481 respondents adamant that the family home should not be part of the Age Pension assets test. Ninety-six per cent of respondents said they either owned their home outright or with a mortgage. The question whether the home should be part of the assets test in future drew a very difference response, with 45 per cent unsure, 26 per cent saying yes and 29 per cent no. See a selection of member comments on page 19.
Proportion of households by housing tenure type, 1994-95 to 2017-18
Source: Australian Bureau of Statistics
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Increasing your Age Pension entitlements by renovating the family home Jeremy Cooper, Challenger’s chairman of retirement income, explains how home improvements can boost your government entitlements.
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ith your house being such a foundational part of any retirement income decision, it’s important to remember that it’s not usually considered an assessable asset when determining Age Pension entitlements. Therefore investing in your home could help boost your Age Pension. Consider some of these numbers. The total value of housing across Australia is heading towards $8 trillion. That’s about 10.6 million dwellings that are worth, on average, a bit more than $700,000 each1. In fact, the average is now probably more given the surge in prices during the autumn auction season. Low interest rates have underpinned strong demand for housing over the past six months. Auction clearance rates have been sitting around
the 80 per cent mark in recent weeks – higher than usual – and the four big bank chief executives have forecast price rises of at least ten per cent this year2. Of course, there are big discrepancies between the city and the bush, between (and within) capital cities, between houses and units. With the exception of inner-city apartments in Sydney and Melbourne, the housing market has been broadly strong. Eight trillion dollars in housing is a lot of value. That’s 266 per cent more than the combined value of super assets in Australia. So it makes sense to put housing and super at the centre of any decision about managing your
1. R esidential Property Price Indexes: Eight Capital Cities, December 2020 | Australian Bureau of Statistics (abs.gov.au) 2. Senate Estimates Hearings, Canberra, 15-16 April 2021
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retirement income once you’ve finished your working life. Add in the Age Pension which for many – in fact, most – is the third ‘asset’ in the retirement decision making process, and you have the three pillars for most people. (Of course, the Age Pension isn’t actually an asset you can buy or sell, but for those eligible, it does help fund retirement.) One of the quirks of Australian society, including its taxation system, is that it puts home ownership at the centre of physical, emotional and financial well-being. There’s an aura about owning your own home. It’s why we talk about it at barbecues, go to open-houses when we have no intention of buying, and are amazed at how expensive property is. The government’s tax and superannuation rules may contribute to this aura. In the case of the Age Pension means tests, the family home or principal place of residence is not an assessable asset. When it comes to applying for the Age Pension, you can have a $20 million mansion, and assuming you have no other assets, or limited assets, you can still get the Age Pension.
Any investment in your house, which improves its comfort, safety and efficiency, could also help you access Age Pension entitlements.
Case study (for illustrative purposes only) Kevin and Helen love their home, which they bought, back in the 1970s, for $34,000 and is now worth about $950,000. They have $600,000 in super, $30,000 in personal assets and $50,000 in the bank. Their assessable assets total $680,000.
While Kevin and Helen have maintained their home immaculately, it’s getting tired. The kitchen and bathrooms are original and need a makeover to take them well into their retirement years. They were planning on doing renovations in a few years, but after speaking with their financial adviser they decide to bring forward the cost to enjoy their renovations sooner and get some more Age Pension today.
These same rules can come in very handy if you want to access the Age Pension but can’t because of the value of your assessable assets. Any money spent on repairs or renovation of a home contributes to its value. The money spent (hopefully) increases the value of your home and becomes exempt from the assets test. That investment in your house, which improves its comfort, safety and efficiency, could also help you access Age Pension entitlements by reducing your assessable assets. Take the example of installing a solar energy system in a home. It’s sustainable, helping the environment. It could also reduce your power bill throughout retirement. If you keep going and modernise the bathroom, energy saving water devices could be installed, improving not just the comfort and value of the home, but also reducing ongoing energy bills. Like all things in the world, there is a trade-off. The money you spend on the house improving its comfort and value isn’t available to fund other aspects of retirement. So, it’s always best to speak to your financial adviser before making any financial decisions.
The building work (including solar panels and water saving devices) cost them $72,000, leaving them with about $608,000 in assessable assets. This reduction in assets boosted their combined Age Pension by an extra $5,616 in the first year, increased the value of their home and reduced their yearly electricity and water bills. Jeremy Cooper is Challenger’s chairman of retirement income and focuses on research, public policy issues and thought leadership. Before joining Challenger, he chaired the ‘Cooper Review’ into the superannuation system, and those recommendations have been substantially adopted. DISCLAIMER: Case study for illustrative purposes only. Age Pension entitlement increases are based on Social Security rates and thresholds effective 20 March 2021. Age Pension benefits described above will not apply to all individuals. Age Pension outcomes depend on an individual (or couple’s) personal circumstances and may change over time. The information in this article is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger Life), general only and has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the relevant product. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au All references to guaranteed payments from Challenger refer to the payments Challenger Life promises to pay under the relevant policy documents. Neither the Challenger group of companies nor any company within the Challenger group guarantees the performance of Challenger Life’s obligations or assumes any obligations in respect of products issued, or guarantees given, by Challenger Life.
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Pension Loans Scheme: Where it fails and how it can be fixed Australians can supplement their retirement income through the Pension Loans Scheme. Janelle Ward and Ben Hocking explain the scheme and retirement specialist Paul Rogan tells what needs to change.
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he federal government’s Pension Loans Scheme (PLS) allows older Australians to receive a non-taxable fortnightly loan to supplement their retirement income. This option allows recipients to choose the amount of the loan – up to the maximum loan amount – but the money won’t be paid as a lump sum and the loan and all costs and accrued interest must be repaid. Repayments can occur at any time.
To be eligible for the PLS • you or your partner are of Age Pension age and you meet the Age Pension residency rules (i.e. you live in Australia and are an Australian citizen, permanent resident and/or special category visa holder for at least 10 years, including five years of continuous residence) • you must be receiving – or qualify to receive – a qualifying pension (including those who are maximum-rate pension recipients). You are still eligible for the PLS even if you have a payment rate of $0 for either the income or assets test. Qualifying pensions include: Age Pension, Carer Payment, Disability Support Pension • you or your partner must own real estate in Australia that you can use as security for the loan and have that real estate properly insured • you must not be bankrupt or subject to a personal insolvency agreement.
How much can you get? How much you are eligible for will depend on your age and how much equity you own in your Australian real estate. The maximum loan amount generally increases each year as you or your partner get older. Changes to the value of the real estate you use as security will also affect your maximum loan amount. If the value increases each year, your maximum loan will also increase. If the value decreases, then the maximum loan will decrease. You can get up to 1.5 times the maximum payment rate of the pension each fortnight, although you are 12
not required to borrow the maximum amount each fortnight. The PLS charges an annual interest rate of 4.5 per cent that compounds fortnightly on the outstanding loan balance. The longer you take to repay the loan, the more interest you pay. Unlike commercial reverse mortgages, lump sums are not available under the PLS.
What can you use as security? You can only use real estate in Australia as security for your loan. It can be the home you live in or an investment property you or your partner own. It can also be real estate owned by a company or trust. Either you or your partner must be an attributable stakeholder of the company or trust. Property in a retirement village can be considered as security if: • you or your partner’s name is on the freehold title for the property • there isn’t a contract term that prevents or limits your ability to sell the property • you or your partner’s estate control the distribution of the asset.
What are the costs? There are no establishment or monthly account fees with a PLS loan. Services Australia may, however, charge costs (including legal fees). Setting up a loan requires a valuation of your property by a licensed valuer, but you will not pay this cost. You will, however, have to pay any costs associated with registering and removing the charge or caveat Services Australia will place on your property’s title deeds.
The history The PLS was created in 1985 when the Hawke government reintroduced an assets test for pensions. It was first proposed by a panel headed by Professor Fred Gruen.
YourLifeChoices Retirement Affordability Index™ May 2021
The panel recommended an assets test that included the pensioner’s home. In doing so, it recognised that an assets test could disadvantage people with assets that were difficult to sell, either because there were few buyers or for “social or psychological reasons”. To deal with that problem, the panel proposed setting up a scheme that would allow people to receive a ‘pension-sized’ amount as a loan that could be recovered from their estate.
The criticism The scheme has failed to attract much interest, despite changes in 2019 that allowed self-funded retirees to access the scheme and an increase in the amount that can be borrowed. Paul Rogan, founder of retirement specialist provider Pension Boost, believes there are still too many barriers to the scheme and is seeking five key changes to make it more accessible and transparent. 1. Change the name. Mr Rogan says Australians fixate on the word pension in the title, which results in many believing the scheme is available only to age pensioners. He suggests changing the name to the Seniors Loans Scheme. 2. Spread the word. Mr Rogan also says more money needs to be invested in educating older Australians about the existence of the scheme and its benefits. “Many retired baby boomers have most of their capital in their homes but hold a limited amount of superannuation,” Mr Rogan says. “The majority have access to some Age Pension and do not want this put at risk. “In coming from a position of caution, many are overlooking the benefits to them of the Pension Loans Scheme. “With more than 1.8 million age pensioners owning their own homes, the potential to top up their income without affecting their Age Pension eligibility is significant.” 3. Lump sum. Mr Rogan also wants the scheme to allow a one-off upfront payment for larger expenses. Permitting a one-off lump sum payment would allow retirees to access the scheme for home repair and maintenance costs, or buy a new car that their retirement savings would not allow for, he says. 4. Better protection. Commercial reverse mortgage providers have been required to provide a ‘no negative equity guarantee’ since 2012, and Mr Rogan believes the PLS should be subject to the same guarantee.
5. Cut the interest rate. The interest rate for accessing the scheme should be reduced and independently benchmarked to the RBA official cash rate to improve transparency, Mr Rogan says. The PLS interest rate was last cut from 5.25 to 4.5 per cent in December 2019.
What the government says The Department of Social Services responded by telling YourLifeChoices that the government was focused on providing older Australians with choice in retirement. A spokesperson said: “Last year, we reduced the (PLS) interest rate to 4.5 per cent, which is well below similar commercially available schemes that range between 4.95 per cent and 5.60 per cent. “In the most recent Budget, the government committed $9.6 million to improve digital service delivery to make it easier for retirees to access.” Traditional mortgages are repaid gradually throughout the term of the loan, says the DSS spokesperson, but with the PLS, the principal amount and interest are paid only when the loan is recovered, which typically occurs when the linked real estate asset is sold. Therefore, the PLS is not comparable to a standard mortgage product. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
YourLifeChoices Retirement Affordability Index™ May 2021
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Should you consider a reverse mortgage or equity release? Retired actuary John De Ravin explains two key financial strategies that can help homeowning pre-retirees and retirees boost their retirement income.
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wo strategies that can boost homeowners’ retirement income are the reverse mortgage and equity release. Here’s what you should know about these schemes.
A reverse mortgage Read this strategy if: • you are retired and own your own home with little or no current mortgage, and you would like to boost the amount of cash you have available for current spending • you are happy to use some of your home equity, recognising that this will diminish the size of any estate that will ultimately be inherited by your beneficiaries.
by about 1 per cent for every year of age. So, for example, if you take out a reverse mortgage at age 70, lenders may be prepared to lend about 25–30 per cent of the value of your home. ASIC has a reverse mortgage calculator available on the MoneySmart website.
Factors to take into account before you decide Given that a reverse mortgage generally allows you to live a nicer life but at a cost to your estate, a question you might like to consider is the legacies you would like to leave to your beneficiaries.
Some retirees are quite Since legislation was introduced in Some retirees are quite happy to September 2012, the lender is not happy to go on SKI go on SKI holidays (‘spend the permitted to recover any money kids’ inheritance’) but others are holidays (‘spend the from you (or your estate) other determined to leave bequests for than the proceeds from the sale of kids’ inheritance’) but their children, relatives, friends, the home even if the proceeds of others are determined to charities or other beneficiaries. If selling the home are less than the you own your house and manage outstanding balance of the loan. leave bequests. to get by on the Age Pension (and Because of this ‘no negative equity’ whatever other assets you may guarantee, the interest rate is higher own), then you will always leave the family home to than banks would normally charge on a home your beneficiaries. If you take out a reverse mortgage, mortgage. Currently (April 2021), typical reverse depending on how much of the mortgage you draw mortgage interest rates are in the vicinity of 5 or 6 on and how long you remain in your home before it is per cent at a time when standard mortgage rates sold, it may be that little or no equity in your home will are typically in the vicinity of 2 to 3 per cent. remain to be inherited by your beneficiaries. Also, because the lending institution is aware that you don’t have much capacity to repay the loan and Also, if you are receiving the Age Pension, there may be an impact on your pension entitlement. The reverse the loan amount will accumulate with interest until mortgage drawdowns themselves are not counted as you move out or pass away, the lender will only be income for the purpose of the means test, but if the prepared to lend a relatively small percentage of the borrowed money is then held as a financial asset (such value of the home, nothing like the 80 per cent that lenders may typically lend where regular repayments as in a bank account), then the money in the bank account (apart from the first $40,000 for the first 90 of principal and interest are being made. days after you draw down the loan) is counted as an According to the ASIC MoneySmart website, lenders asset for means testing purposes. will typically be prepared to lend 15–20 per cent of Read the complete article here or buy Slow and the value of your home if you take out the reverse Steady from John De Ravin’s website. mortgage at age 60, but that percentage increases 14
YourLifeChoices Retirement Affordability Index™ May 2021
Selling equity in your home Read this strategy if: • you are retired, own your home with little or no mortgage and you would like to boost the funds you have available for spending • you are not keen on a reverse mortgage because you want to be sure that a certain percentage of the equity in your property will still belong to your estate, no matter how old you are when you pass away. Australians have an alternative way of tapping into the equity in their homes to provide additional funds for current living expenses, or to meet urgent oneoff expenses. You can sell a percentage interest (say 50 per cent) in your home to a financier and receive a discounted value of that interest. When you sell your home, or when you pass away, the lender is entitled to the agreed percentage of the sale proceeds of your home. With a traditional equity release product, you receive only a discounted value of the share in your home’s value though, because: 1. the acquirer is not entitled to receive any rental income from the property and 2. the acquirer is not permitted to sell your home to recover their money until you decide you want to sell (or you and any surviving spouse pass away). The younger you are, the higher the discount because the sale of your property and payment of the share to the acquirer may not occur for a very long time.
This form of tapping into the equity in your home is known as a home reversion scheme or sometimes as home equity release. More detail about home reversion schemes is provided in an article on the ASIC MoneySmart website. If you are considering a home reversion, probable criteria are as follows: •h omeowners must have attained a certain minimum age, typically 55 or 60, at the date of contract • homes must be within eligible postcode areas (mainly Sydney and Melbourne) • homes must be freestanding, or if a unit or strata property, there must be no more than six dwellings on the title plan (excludes apartments) • the property is the principal place of residence for at least one homeowner at the time of exchange of contracts • the land value of the property is 60 per cent or greater of the total market value of the home • all permanent residents in the home are shown as property owners (or have an interest) on the certificate of title or can be added as required • homeowners have no debt on their title or all existing mortgages can be discharged before, or at the contract date. An alternative, the ‘fractional equity release’ model, has also been developed in the past few years. Under the terms of a fractional equity release transaction, you sell a proportion of the equity in
YourLifeChoices Retirement Affordability Index™ May 2021
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Unlike the situation with a reverse mortgage, where it is impossible to know in advance what percentage of the equity in your home will remain after you have paid off the loan, you always know what percentage of the proceeds of selling your home you (or your estate) will be entitled to on sale: it is simply 100 per cent less the share that you have sold to the acquirer. However, no-one is in a position to know the dollar amount that will go to the acquirer until the property is finally sold.
Before you decide, consider these factors
your home to the purchaser, but in this case, you will be liable to pay the appropriate proportion of the gross rent for your property to the purchaser (though it may be possible to sell additional fractions of your home over time to avoid the need to pay such rents to the purchaser). The advantage of a fractional equity release transaction from the seller’s perspective is that the seller will receive a higher proportion of the value of their home in cash at the date they enter into the fractional sale contract. The disadvantage relative to the more traditional equity release model is that you must pay rent on the fraction of your property you have sold.
What does it mean for you financially? Essentially, the consequences of a home reversion are that you will receive money from the acquirer now and can do whatever you want with it. There are no constraints on how you use your home; you can even move out and rent out your property if you wish. You do not have to sell your home when you move into aged care (though you might need to sell your home if you are trying to assemble an accommodation deposit, so you can enter the aged care home of your choice). Of course, the consequences are borne by your beneficiaries in the sense that when you pass away or whenever you choose to sell your home, the acquirer will be entitled to the agreed share of the sale proceeds. 16
1. Depending on what you intend to do with the proceeds, if you are a full or part age pensioner there may be implications for the amount of Age Pension you will receive. If, for example, you hold the proceeds of the home reversion as financial assets, those assets will be subject to the assets test and also the assets will be subject to ‘deeming’ for the purposes of the income test. If you are a part pensioner, the amount of pension to which you will be entitled is likely to be affected. If you are a full pensioner and the amount you receive from the home reversion is sufficient to breach the minimum threshold for the assets test or the income test, you will lose at least part of your pension. You should check with Centrelink on the likely outcome for your pension entitlement. 2. The home reversion decision has implications for your estate, since only a proportion of the proceeds of the sale of your home will fall to your estate. (Also, of course, you can’t leave your home to one of your beneficiaries because after you and your spouse have passed away, under the terms of the contract, the home will have to be sold so that the acquirer can be paid their share of the sale proceeds.) If you are considering using a home reversion scheme, it is worth discussing your intentions with your beneficiaries. 3. It is worth considering the situation that may arise later in life in the event that you can no longer look after yourself and you need to go into an aged care facility. If you have used the value of your home towards your current consumption, will selling the remainder provide you with a sufficient lump sum to fund your aged care accommodation deposit? Read the complete article here or buy Slow and Steady from John De Ravin’s website for $39.95. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
YourLifeChoices Retirement Affordability Index™ May 2021
Downsize your home and boost your super The downsizer contribution was announced in the 2017-18 Federal Budget. Janelle Ward reports on the uptake of the scheme, its supporters and critics.
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n the 2017-18 Budget, the government announced that, from 1 July 2018, an eligible person could make a downsizer contribution into his or her superannuation.
You are eligible to make a downsizing contribution if:
Costs to consider Actuaries Institute fellow and author John De Ravin writes in his book, Slow and Steady: 100 wealth building strategies for all ages, that when estimating the financial impact of downsizing, you need to allow for the expenses of selling and buying.
• you are aged 65 or older at the time you make the contribution • the contribution is from the proceeds of selling your home on or after 1 July 2018 • your home was owned by you or your spouse for 10 years or more prior to the sale • your home is in Australia and is not a caravan, houseboat or other mobile home • the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption • you have not previously made a downsizer contribution to your super.
“Typical selling expenses are in the order of 3 per cent to 5 per cent of the sale proceeds – the main items are commission (often 1.5 per cent to 2 per cent) and the expenses of preparing the property and the marketing campaign, but there are also other expenses such as legal/conveyancing expenses and removalists,” he writes.
How much can you contribute?
Obviously, anyone whose family has moved out would consider downsizing – especially if maintenance of the home and garden is becoming a burden.
Individuals – singles and both members of a couple – can contribute up to $300,000 to their super. It is regarded as a non-concessional contribution, will not count towards the contributions caps and can still be made even if the total super balance is greater than $1.6 million.
“Typical buying expenses are of the order of 5 per cent to 7 per cent of the purchase price of the property with the main expense being stamp duty, and minor expenses being legal expenses, the cost of inspections and mortgage-related expenses.”
To downsize or not to downsize?
And if there is a fear that the nest egg is unlikely to provide the desired retirement lifestyle, a downsizer contribution is valuable. So are older Australians using the downsizer strategy?
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As of July 2020, only 14,712 of four million Australians aged over 65 had taken up the scheme, domain.com reports.
Of potential downsizers, 40 per cent said they would be likely to move if there was suitable housing in their preferred locations.
“If the scheme had been successful, we would have seen larger numbers,” says Grattan Institute economist Brendan Coates, adding that financial motivation is not the reason people downsize.
A report prepared by Downsizing.com.au took the view that the booming housing market was making downsizing an increasingly lucrative tactic in helping over 50s secure their financial future. It said the average amount released in downsizing from a house to a retirement village in 2020 was $286,810.
The Productivity Commission (PC) says 83 per cent of Australia’s five million people aged over 60 want to age in their homes, choosing “location, size and emotional ties over downsizing, right-sizing or retirement communities”. Mr Coates says people will only move to a smaller home if they must, for practical reasons such as not being able to cope with a big garden or stairs. And when they do move, they often want to stay nearby. Abolishing stamp duty and including more of the home in the assets test for the Age Pension would likely do more to encourage people to downsize, he says.
Downsizing.com.au CEO Amanda Graham said that between 2015 and 2020, the median price of houses that sold in the same neighbourhood as retirement village units jumped by 25.7 per cent, compared to 20.3 per cent for ‘Abolishing stamp duty the retirement village units.
and including more of the home in the assets test for the Age Pension would likely do more to encourage people to downsize.’
YourLifeChoices reported last month that the housing boom was further slowing the rate at which Australians were downsizing, with many older homeowners preferring to stay in their homes for longer due to rapidly rising property prices. The trend was being labelled ‘the other FOMO’ – or Fear Of Moving Out. A Global Centre for Modern Ageing study found eight in 10 seniors wanted to stay in their current home for as long as possible and three in four wanted to stay in their current home even if circumstances changed and help was required. Given the final report of the aged care royal commission, many baby boomers are determined to keep the family home in order to avoid aged care facilities. Taking a contrary view, an analysis of an Australian Housing Aspirations (AHA) survey found that downsizing was an “integral part of the current and future housing preferences of older Australians”. Of the 2422 older (aged 55-plus) respondents to the AHA survey, 26 per cent had downsized and a further 29 per cent had considered downsizing. Australians who had downsized had done so to achieve a particular lifestyle (27 per cent), for financial outcomes (27 per cent), because their garden or property required too much maintenance (18 per cent) or because they were forced to do so (15 per cent). 18
She said the report showed that downsizing had increasing potential to allow over 50s to release equity from their home and boost their retirement income. “Traditionally, people have downsized because of lifestyle reasons or because they want to reduce their amount of home maintenance,” Ms Graham said.
“Surging Australian house prices, and the rise in mortgage levels, have meant that a new breed of downsizers are also motivated to release equity from their home to help set themselves up for retirement. This trend should be welcomed and encouraged.” The report identified policy and regulatory barriers that may prevent some homeowners from downsizing, including stamp duties, restrictions on housing supply and the Age Pension assets and means tests. While the family home is exempt from the assets test, the proceeds of sale from the home are not. The report’s release comes after the publication of the federal government’s Retirement Income Review (RIR) in November 2020, which stated that home ownership and equity release was an important but under recognised element of retirement security. The RIR found that very few retirees were using the equity in their home to improve their standard of living. Ms Graham said the NSW government was looking at stamp duty reform to help remove one potential equity release barrier for downsizers, while the ACT government had committed to reducing stamp duty rates. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
YourLifeChoices Retirement Affordability Index™ May 2021
Home truths – from the ‘experts’ and you
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ncluding the family home in the assets test for the Age Pension is the idea that just won’t go away. The Certified Practising Accountants of Australia recently asked teams for ideas on how to address issues relating to our ageing population. You guessed it – the winning team put forward a proposal to include the family home in the pension assets test. This is what you thought of the idea. “We should arrange for a petition of demands. (1) Universal Pension for all retirees, no asset or income tests. (2) Any political party contemplating forcing retirees to sell their home to supplement their pension will feel the anger of millions of retirees at the next federal election.” “It is ludicrous that million dollar homes are not included in the pension assets test. [Pension] eligibility requires a complete overhaul.”
“A pensioner is a person who worked hard to buy a house and this house has increased in value over the years. What are they trying to do? Kick him off his house, take off his pension and make him join the lines of homeless?”
“Any government that brings [the family home] into pension testing will not be the government much longer.”
“There should be no means test at all. Whoever pays tax over a certain number of years gets a pension, regardless of assets or income. Part of a Universal wage idea. CERTAINLY never the family home – it is a home, not just an ‘asset’.”
“If the family home is considered an asset for the assessment of an Age Pension, will the owner be able to claim a rebate on all upkeep and expenses related to the home?”
“I own my home and see no problem with the home being included [in the Age Pension assets test]. I have seen so many elderly hold onto their home, not having a penny in the bank, scrimping and saving for food, struggling to pay bills and needing a lot of home care, just because they fear losing the full pension.”
“It is clear that, if the majority of retirees want a comfortable standard of living in retirement, home equity release will become a greater source of income later in life.”
“The accountants seem to think that including the family home in the assessment for the pension would reduce the numbers on the pension and thus direct more money to aged care etc. If only! It would go into consolidated revenue and probably buy more submarines that will be obsolete by the time we get them.”
“Universal pension for ALL over 65. No more asset testing. No more income testing. No more deeming rates.”
YourLifeChoices Retirement Affordability Index™ May 2021
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Government update YourLifeChoices keeps you up to date with government changes that could affect your retirement. Age Pension changes From July 2021, the Age Pension eligibility age will go to 66.5 years of age, which could be confusing if this is the year you turn 66. If this is relevant for you, make a diary note to look closely at the Age Pension application process 13 weeks before your actual birthday, so you can address any hiccups well in advance.
Pension payment update Age Pension payments increased on 20 March 2021. The following fortnightly pension payment rates apply: Maximum fortnightly Age Pension payment rates Previous Current Increase Single Base Supplement Energy Supplement Total
$860.60 $69.60 $14.10 $944.30
$868.30 $70.30 $14.10 $952.70
$7.70 $0.70 — $8.40
Couple (each) Base Supplement Energy Supplement Total
$648.70 $52.50 $10.60 $711.80
$654.50 $53.00 $10.60 $718.10
$5.80 $0.50 — $6.30
Age Pension rates are due to be adjusted from 20 September 2021. The upper thresholds for the assets and income tests (i.e. for those who are eligible for a part Age Pension) will also be adjusted at that time.
Concession card As soon as you receive a Pensioner Concession Card, start applying for your entitlements. The top five are: • gas rebate • electricity rebate • water rebate • council rate discount • driver’s licence and registration concession.
Super changes The Australian Taxation Office (ATO) has confirmed increases to a number of superannuation key rates and thresholds, which could provide a boost of up to $100,000 for some retirees. From 1 July 2021, Australians will be able to put more into their super because the concessional and non-concessional contribution caps, and the 20
general transfer balance cap are set to increase due to indexation for the first time since July 2017. The annual concessional contribution cap will increase from $25,000 to $27,500. The annual nonconcessional contribution cap, for contributions that are made into your super fund after tax is paid, will increase from $100,000 to $110,000 on 1 July. The latest figures also show an indexed increase in the transfer balance cap from $1.6 million to $1.7 million. Further information is available on the ATO website.
Tax time If you earn less than $54,837 and add money into your super fund before 30 June, the government may also make a super co-contribution up to a maximum amount of $500. The co-contribution amount depends on your income and how much you contribute. To get the maximum co-contribution of $500, your income must be $39,837 or less and you need to make a contribution of $1000. If your income is between $39,837 and $54,837, your maximum entitlement will reduce progressively as your income rises. The money needs to be in your super fund by 30 June to be eligible for a co-contribution for this financial year. You may also be able to claim a tax deduction for any after-tax contributions you make to your super fund, which could potentially increase your tax refund.
Electricity rebates The NSW government offers several electricity rebates for older Australians; however, they each work differently. For Australians with a Pensioner Concession Card, there is a Low Income Energy Rebate. If you have an account with an energy retailer, you can simply let them know your card details, and your rebate is applied directly to your account. This arrangement should stay the same until you change it. If you live in an ‘on-supplied’ residential community, retirement village or strata scheme, you have to apply for your rebate and reapply each year. Self-funded retirees need to hold a Commonwealth Seniors Health Card and reapply each year.
YourLifeChoices Retirement Affordability Index™ May 2021
