Home is where the income is

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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Written by Sean Corbett

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