Why your home should be part of your retirement income

Family home provides retirees with the means to take care of themselves: Sean Corbett.

family home

Economist Sean Corbett, who explained the concept of the retirement income ‘sweet spot’ in the June edition of YourLifeChoices’ Retirement Affordability Index™, presents his view on whether the family home should be included in the assets test for the Age Pension.

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The value of the family home – perhaps above a threshold amount – should be included in the asset test, but maybe only after better products become available to enable people to access the equity in their home. Here’s why.

As with superannuation, people build up an asset by paying off a house for a considerable part of their working life. That asset has a value that should be required to be accessed to provide for the owner/s during their retirement.

Where the home is of a value that exceeds the threshold value – as in the case of a retiree who continues to live in a five-bedroom home after the children have left – that owner should be encouraged to tap into this value to provide for themselves.

However, tapping into the excess value of the home should not necessarily require it to be sold or involve large debts secured against the home. Unfortunately, these are the only two options that are generally available in Australia.

So how can the family home best supplement retirement income?
As mentioned above, releasing excess value in the family home can generally be achieved in only one of two ways in Australia.

The first is by selling the home and using the proceeds to rent or retaining some of the proceeds and using the rest to buy a less expensive home. However, most people are attached to their home for obvious emotional reasons, and to the area where they are likely to have family, friends and support networks – networks that become even more important in retirement.

The second is by taking out a reverse mortgage, which is a loan secured against the home and which generally accrues interest on the debt rather than requiring interest to be paid periodically.

The problem with reverse mortgages is that the debt will continue to grow over the long period of retirement and can potentially approach or exceed the value of the home itself, though the professional association representing reverse mortgage providers in Australia ensures that their members cannot allow this to happen.

Regardless of this protection, the net benefit of investing the value received from taking out a reverse mortgage will be reduced by the interest charged.

A better way forward would be for the Government to encourage the development of appropriately structured products that take the approach of shared equity schemes or shared appreciation mortgages (SAMs), where a lender agrees to receive some or all of the repayment in the form of a share of the increase in value (the appreciation) of the property rather than being repaid in the form of interest that accumulates.

The Government should encourage the development of these types of products and a market for them before it considers including the family home in the assets test.

Expanding current retirement income initiatives
I note that the Government over the past few years has conducted reviews aimed at encouraging the development of innovative retirement income products for super and has already introduced legislation to that end. That initiative should be expanded to cover the development of innovative equity release products.

As well as encouraging the development of suitable products to facilitate the release of equity in the family home, the Government should also look at amending the rules around super to allow any equity released to be contributed to super, as has been done with the Government’s existing downsizer legislation, without making people meet current contribution requirements such as the work test.

Potential other benefits
Including the family home in the assets test would potentially allow us to achieve the removal of the thresholds between homeowners and non-homeowners (the distinction is quite punitive for non-homeowners at the present time).

It would also imbue the welfare system with at least part of the philosophy behind the superannuation system, which is that concessions should not be provided for the purposes of hiding assets in a concessional environment in order to aid the passing on of wealth to future generations.

Quite simply, the assets and income tests are collectively called means tests and the accumulation of assets within the family home (perhaps above a certain level to take political realities into account) provide people with the ‘means’ to take care of themselves in retirement.

Not to do so is simply to provide people with taxpayer-funded assistance in order to increase their chances of passing on accumulated wealth to their beneficiaries.

Do you agree or disagree with Sean Corbett’s views?

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    COMMENTS

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    Triss
    12th Jul 2019
    10:00am
    Trust an economist to ringmaster a circus. How exactly are they going to, fairly, evaluate properties in different parts of Australia?
    Let’s get rid of the politicians’ corrupt pensions first.
    Farside
    12th Jul 2019
    4:57pm
    rates notices
    Blinky
    12th Jul 2019
    6:18pm
    You can have all sorts of theories about a pensioner's primary home. The best one is: DO NOT TOUCH IT!
    Farside
    12th Jul 2019
    6:22pm
    gee that is a persuasive argument Blinky. I agree with Sean Corbett. It is inevitable this change will eventuate despite the disgruntled telling the tide to turn back.
    Rae
    13th Jul 2019
    8:39am
    Why hasn't any of these financial guys suggested a line of credit against the home for personal investment. If you keep their fingers out of your money it makes a lot of sense. Then the debt subtracts from the home and everyone is equal.

    A $500 000 home and a $300 000 Line of credit would work.

    While markets are running hot on trillions of central bank money creation it seems like a reasonable idea.

    Has Sean any ideas about how we will go on when all that fake money dries up?

    Any bets on what happens if the insolvent banking system implodes because it sure looks dodgy right now in my opinion.
    patti
    12th Jul 2019
    10:21am
    We can be sure this economist is not trying to maintain a home while the Age Pension is the only income. By the time I've paid council and water rates, body corporate fees, insurance, mortgage and taken care of essential repairs, there is not much left to live on. So how can my home be regarded as an asset - because it certainly doesn't provide me with an income!
    Tood
    12th Jul 2019
    11:25am
    As 7.5% of the tax you paid over your working life should have gone into the pension fund instead of general revenue you have paid for your pension and the value of your house shouldn't come into the equation especially as Patti has said your home is not cost free even if the mortgage is paid off
    Farside
    12th Jul 2019
    5:00pm
    what pension fund Tood? It disappeared decades ago. The diatribe over the National Welfare Fund demise is boring and unhelpful. Menzies knew it was a lame duck, shame he did not shoot it way back then.
    Rae
    13th Jul 2019
    8:43am
    In 1970 we left the gold standard behind. All money is fake now so there is no issue using it apart from inflation. We are currently in deflation so even that isn't an issue.

    Plenty of fake money and lots of goods and services waiting to be bought.

    Problem is the fake money is accumulating in financial assts owned by the top 10%.

    Let's cut their taxes again. That will fix it won't it?
    mogo51
    12th Jul 2019
    10:58am
    Now that is a good idea Triss
    Julian
    12th Jul 2019
    11:17am
    It makes you wonder how much extra money the government would have available for worthwhile causes had it not WASTED so much over the years.
    Rae
    13th Jul 2019
    8:47am
    Problem here is the government has sold most of everything taxpayers built years ago. I flew into Sydney's Macquarie owned airport a few days ago and it looks like it belongs to a third world nation. It's a disgrace after brilliant government owned airports in other countries.

    If privatisation is going to work then there needs to be rules about maintenance and investment in the asset.

    Just running everything into the ground for shareholders isn't terribly clever.
    Dabbydoos
    12th Jul 2019
    11:32am
    I live in a 3 bedroom unit with my daughter who is also my carer. I receive a full pension and have no superannuation to speak of. Like Patti after rates, insurance, electricity and gas there is little left . What do I downsize to, a large cardboard box, because that is where I will end up if the family home is considered an asset.
    Farside
    12th Jul 2019
    5:02pm
    nobody is saying anyone has to downsize. If you are in a modest place the obvious solution would be to treat it generously, if you are in a seven figure home then clench tightly because here it comes.
    Blinky
    12th Jul 2019
    6:24pm
    If politicians live in expensive homes and still get a full, fat pension x life, why should Aussie battlers be treated differently?
    Are pollies some kind of untouchable class n pensioners some kind of a lesser class that can be kicked around willy-nilly by 'smart economists' and politicians???
    Priscilla
    12th Jul 2019
    11:35am
    Why bother to buy a home in the first place. Just spend your life renting so you can make someone else wealthy! Ridiiculous suggestion to include the family home. People who have not bothered to provide for their retirement get looked after whilst those who have gone without to ensure a retirement with a roof over their heads are being penalised. To try and sell a home in this economical environment is lunacy. That together with exhorbitant government charges, realestate fees etc., makes it unlealistic, to say the least. We would end up sleeping in shop entrances in Perth as so many are doing now with the terrible state of the economy. Mark McGowan has killed off Perth with his parking fees and is costing people not only their jobs but also their homes. Wake up!
    tams
    12th Jul 2019
    11:43am
    The article misses some important points
    1) The Government has launched its own reverse mortgage product - Pension Loan Scheme - this should have been included in the article
    2) Re The problem with reverse mortgages is that the debt will continue to grow over the long period of retirement and can potentially approach or exceed the value of the home itself, though the professional association representing reverse mortgage providers in Australia ensures that their members cannot allow this to happen.
    a) the association no longer exists
    b) No Negative Equity Guarantee is written into legislation and regulated by ASIC
    c) It is virtually impossible to have negative equity if the funds advanced are taken as an
    income stream
    3) There is another form of Equity Release available in Melbourne and Sydney - It's a lump sum and called a Home Reversion Scheme. As it is a lump sum, it is dearer than a reverse mortgage income stream and, if the amount to be repaid was considered as a interest loan, the interest rate would be around 9 - 10%.
    Tricky
    12th Jul 2019
    12:17pm
    Why are people that are not effected making the decisions. They have no skin in the game and all is hypothetical! BS. Typical we plan for retirement then some DH comes along with hypothetical ideas of changing our lives. These economists and government have another end game! Neither can be trusted to work in our interests.
    Karl Marx
    12th Jul 2019
    12:24pm
    The pension is broken but neither party has the guts or balls to fix it & it's a simple fix that will stop all this rubbish banter that just goes on & on & on. Every week we hear some top end of town wally pension bash about the family home, tighter asset testing etc, etc.
    Stop bandaiding the pension & fit the problem permanently, easy & simple.
    Farside
    12th Jul 2019
    6:32pm
    O&W says "Stop bandaiding the pension & fit [fix] the problem permanently, easy & simple." ... I agree, but we will wait until government of the day accepts the tax and social security systems are broken, sets out to redesign them from scratch and puts in place a plan to progressively migrate from the old to the new without trying to pick and choose political winners (e.g. Henry Tax Review), but I suspect it won't be this government. I hope my skepticism proves to be misplaced.
    Not a Bludger
    12th Jul 2019
    1:16pm
    Poppycock - and I need my giddy aunt to keep these rent seeking economists well away from my life & wallet - and well away from any decision making on such matters.
    libsareliars
    12th Jul 2019
    1:42pm
    Keep away from my home!
    Jenny
    12th Jul 2019
    2:45pm
    We have to face the fact that the number of retirees is growing exponentially, and government is finding it more difficult to keep paying age pensions. Counting the family home in the assets will only hurt those who live in mansions which are well over the average in value. Those of us who have funded our own retirement have put our own money over our working lives into superannuation instead of bricks and mortar, and been satisfied with an average home. You can't expect to have your cake and eat it too.
    Jenny
    12th Jul 2019
    2:50pm
    Keep in mind that the election promise to cut taxes has significantly affected the expected revenue for the foreseeable future, so economies are going to be required if we want basic human services to continue.
    Captain
    12th Jul 2019
    3:07pm
    Jenny, if the Government got off their collective rear ends and did something about the non payment of income tax by large companies (estimated at approx $65 billion ) per year, then perhaps the discussion of homes to be included in the Asset Test would be irrelevant.

    The home we live in was perfect for us when our children were younger and now we are retired our grandchildren come and stay with us. Downsizing is not on our horizon as all our familly and friends are within a 10 minute drive from us.

    After working and paying tax for over 45 years people should be entitled to a pension free and unencumbered regardless of their assets.

    BTW, we have been retired for ten years and do not receive a pension, so there is no benefit to us if the home is included or not, but I believe the outgoings in buying and maintaining a home should preclude it being included in the Asset Test unless the Govt allows people to claim the interest and maintenance costs accrued over the years.
    Triss
    12th Jul 2019
    3:27pm
    Expand a bit, Jenny, government doesn't have any problem paying huge pensions for themselves, bureaucrats, judges and every other public servant. Look at them first. https://www.afr.com/chanticleer/dealing-with-the-26-billion-unfunded-super-liability-explosion-20160504-gomdtu - Age pensions are just a drop in the ocean and will be less as the majority of people pay into compulsory super.
    Jenny
    12th Jul 2019
    6:08pm
    I am not defending the inclusion of the home, but trying to give some insight into why it may happen. The situation we are in presently is what it is, and will have to be dealt with. There is no justification for the parliamentary pensions and allowances, let alone some of the salaries, but that's how it is at present and we have no way of changing it. They certainly won't do it themselves. And there is an explosion of so-called baby boomers on the point of retiring which will make matters worse.

    It offends me also that large amounts of money are wasted on projects that are either not working (e.g.. Murray-Darling remediation) or are unnecessary (Adani). Billions also on defence spending for craft which will be redundant before we ever see them. Financial support to international companies so that they can use Australian resources for their own gain. Many of the dubious decisions have come from the LNP, and what did we do? Voted them in again. Serves us right! Although whether we would have been better off with the alternative, who knows?
    LiveItUp
    12th Jul 2019
    4:22pm
    Great idea to include the house and it should have been done years ago.
    Blinky
    12th Jul 2019
    6:15pm
    Tell those 'Smart Alex" economists that, if pollies get a full pension and they can still have not one, but as many homes as they like, then a pensioner's primary home should not be included in the asset test.
    LEAVE AUSSIE PENSIONERS ALONE X GOD'S SAKE!!!
    Farside
    12th Jul 2019
    6:37pm
    Who would have thought most comments would disagree with Sean Corbett’s views? How good is free speech!
    Franky
    12th Jul 2019
    9:14pm
    Robert kiyosaki has it right when he states that the home you live in is not an asset but a liability. Let's keep things the way they are
    Rae
    13th Jul 2019
    9:06am
    By the time you subtract all the costs and the inflation there is very little gain from the family home. The same amount invested in shares would be worth tens of millions now.
    johnp
    12th Jul 2019
    9:40pm
    Agree 100% with Triss. Esp. get rid of the politicians’ corrupt pensions first. What with all the perks, travel etc which goes on and on as seen we have seen previously in many examples.
    Thats where the rot and putrefaction is starting; right at the top. Problem is; it creates a lot of distrust, envy and disgust in the average joe blow. However it will continue simply because "they can"; the politicians that is.
    rina1213
    13th Jul 2019
    5:38pm
    oh dear looks like the POLLIES are short on their next BIG, FAT, PAY INCREASE !!!!!!!
    has anyone notice that just before every one of the POLIES pay raises we, THE TAX PAYERS, and I might add the providers of ALL budget $ always receive a cut in some way, obviously to fund their own !!!!!!! so sad we can not find anyone who is just and fair
    johnp
    13th Jul 2019
    9:48pm
    Agree 100% Rina, the pollies extreme and obscene largesse makes one feel quite nauseous actually !!
    Lomo
    14th Jul 2019
    2:30am
    Moving the goalposts again to the detriment of retirees.
    He must own shares in the banks which will end up owning people's homes.
    Anyone following his advice is committing financial suicide.
    Talk about selling the farm and then buying your food from your purchaser.
    Farside
    14th Jul 2019
    5:37pm
    Corbett is not moving any goalposts. The article quite clearly states it is the author's "view on whether the family home should be included in the assets test for the Age Pension". Many people with less conflict of interest than homeowning retirees tend to agree with him.
    Lomo
    14th Jul 2019
    2:30am
    Moving the goalposts again to the detriment of retirees.
    He must own shares in the banks which will end up owning people's homes.
    Anyone following his advice is committing financial suicide.
    Talk about selling the farm and then buying your food from your purchaser.
    Priscilla
    17th Jul 2019
    11:30am
    Whatever way you look at it it is lose, lose, lose for retirees. I haven't worked hard and gone without to pay for my home to have it taken away. Revers mortgages leave you with nothing but debt and downsizing is expensive and uneconomical. Why should I pay rent after working to ensure I do NOT PAY RENT in my retirement. IDIOT!
    rina1213
    30th Sep 2019
    5:11pm
    Very well said Priscilla I am in total agreement with you. This government doesn't care because one way or another they will be gone and leave all the issues to the next mob. And their bottom line will look great at everyone's expense. This thinking of putting our homes into the asset pool will just make the following generations not worry or work hard to own their own home and just have a good time as there would be no benefit to struggling to pay a house off. And for most people a struggle it is. Then of coarse there is the point that governments will have to help with rental assistance and finally Age Care Bonds/Fees. There is a fine line between intellegence and stupidity and I'm sad to say the majority of Politicians are just plain STUPID !!!!!
    ps would they still think this way if this applied to all of the fat cats on the gravy train as well ?
    Malbra
    30th Sep 2019
    11:55am
    The Government should not cap contributions to super funds. The more people can deposit into their fund the greater chance they will not be a drain on us self funded and tax paying retirees and taxpayers generally.


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