The family home is under threat, with a leading superannuation expert saying it should be part of the pension assets test.
Superannuation consultant and independent actuary Michael Rice says retirees’ homes valued at more than about $500,000 should be included in the Age Pension assets test.
His report, The Age Pension in the 21st Century, presented to the Actuaries Institute’s Financial Services Forum yesterday, outlined several scenarios it said would result in government retirement spending being distributed more equitably.
Mr Rice says the pension and superannuation systems favour wealthy, home-owning retirees at the expense of middle-income retirees and renters – a finding mirrored in YourLifeChoices’ Retirement Affordability Index™.
In the most recent March edition of the Index, the two retirement tribes that rent – Cash-Strapped Couples and Singles – are the ones that struggle the most to make ends meet.
“Currently, the exclusion of the family home from the assets test creates distortions in savings patterns and favours home owners over renters,” the Age Pension report says. “In addition, it discourages downsizing, as the proceeds of downsizing would become subject to means testing.
“It also creates anomalies between different home owners. For example, a couple with a home worth $500,000 and $1.25 million of financial assets would receive no Age Pension. In contrast, a couple with a home worth $3 million and minimal financial assets would receive a full Age Pension, at the expense of taxpayers in much less fortunate situations.”
Mr Rice, chief executive of Rice Warner, told the Australian Financial Review that if the value of the family home above a certain threshold was included in the assets test, retirees could be encouraged to downsize and unlock some of the home’s value to provide retirement income.
“This approach may result in a more appropriate allocation of housing supply,” he said, “as retirees no longer reside in unnecessarily large homes.”
YourLifeChoices asked its 250,00 members in its Retirement Income and Financial Literacy Survey 2018 if they believed it was time the family home became part of the assets test for an Age Pension. The survey attracted 5064 respondents with 21.3 per cent saying yes and 70.2 per cent saying no, while 8.5 per cent were unsure.
We also asked at what market price the home should be included in the assets test. Eleven per cent said at $500,000, 30 per cent at $1,000,000, 20 per cent at $1.5 million, 16 per cent at $2 million, five per cent at $2.5 million, and 18 per cent said at $3 million or higher.
In his report, Mr Rice advocates further changes to the way retirement income is structured.
He said wealthy Australians received “the lion’s share” of super tax concessions and were able to build up generous retirement benefits – at the expense of middle Australia.
“It could now be argued that the middle tier of income earners receive lower value from the system,” the report says. “They do not receive full Age Pensions nor do they have the disposable income to build large retirement benefits.”
The report did find that the superannuation system was succeeding in at least one of its goals, with the cost of age and veterans’ pensions expected to fall from 2.7 per cent of gross domestic product at present to 2.5 per cent in 2038. This was attributed to larger super balances and more older Australians putting off retirement and continuing to work at least part-time.
Mr Rice said the pension savings should be ploughed back into aged care and other spending on the aged “to deliver a dignified and comfortable retirement for all”.
What is your view on including part of the value of the family home in an Age Pension assets test? Would it encourage you to downsize?