|Summary: There’s no place like home, especially when it comes to the age pension. But that could be about to change if a recommendation from the National Commission of Audit to incorporate a principal place of residence in the age pension eligibility calculation is adopted.|
|Key take-out: Age pension recipients could be forced to take out a reverse mortgage, sell their home to free up capital, or to take a pension cut.|
|Key beneficiaries: General investors. Category: Retirement.|
The National Commission of Audit’s report recommendation last week that family homes be included in the age pension means test will no doubt be a concern to most retirees, and those nearing retirement.
This, of course, is only a recommendation – and the federal government will be wanting to tread very carefully in regards to the including a retiree’s principal place of residence in the age pension eligibility calculation – an area that until now has been off limits.
But here is what has been proposed by the NCOA, and how it would affect age pension entitlements.
The recommendation is that a single person could own a property valued at $500,000, and a couple $750,000, before their means test would be affected.
While we don’t have a great deal of information about how this might work, let’s consider a principal place of residence that is $200,000 over the property value limit (using the valuation numbers above), and assume that this excess value was added to the new comprehensive age pension income test at the ‘deeming’ rate.
Assuming that you have at least $50,000 of financial investments, then further investments are currently ‘deemed’ to earn a rate of 3.5%. This would mean $200,000 in deemed assets (excess value of your principal place of residence) will be deemed to earn you a further $7,000 of income, reducing your age pension (full or part) by $3,500 a year. (The $3,500 a year reduction assumes that as a single you have other fortnightly income of $156 or more, or that a couple has $276 a fortnight or more.)
If the deeming rate were higher – as it has been in the past and likely will be again in the future as interest rates rise – the reduction in the age pension will be even greater.
Having a value of $200,000 over the principal place of residence limit is not a huge sum of money – the proposed value for singles of $500,000 sits below the average price of a house in many capital cities.
If the recommendation was adopted by the Government, people may have to make difficult decisions about whether to keep living in their home and lose some access to the age pension, or to sell and have greater access to retirement income. The NCOA report notes that “financial products exist which allow homeowners to draw down on the value of their home over a period of time”, a reference to reverse mortgages (see my recent article).
However, there are many people who will not find this an adequate solution.
So what are the personal finance strategies that come out of this? It seems that a focus on securing as much of your financial future without reliance of government support to meet financial goals around retirement is looking like a smarter strategy than ever.
Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor. The comments published are not financial product recommendations and may not represent the views of Eureka Report. To the extent that it contains general advice it has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.