Reserve Bank interest rate cuts and federal government policy changes are combining to threaten the immediate and future living standards of both self-funded retirees and non-homeowner pensioners.
Lower interest rates and investment returns require larger amounts of assets to generate retirement incomes. The government, meanwhile, is cutting back the amount that can be invested tax-effectively into super while, also, from January 1, 2017, applying a confiscatory age pension assets test.
The age pension income test applies a 50 per cent income test to financial assets deemed to earn a maximum 3.25 per cent annually, reducing the return from owning these assets to 1.6 per cent. This deeming rate is above the interest rates available to conservative investors but still leaves some return for pensioners' investments.
The new assets test by contrast reduces age pension entitlement by 7.8 per cent of the value of assets subject to the test. As a result, couples with more than about $830,000 of assets will lose all age pension entitlement worth about $34,000 annually.
Generating an income of $34,000 from $830,000 with current investment returns is almost impossible.
The new super and age pension rules discourage ownership of financial assets. For married couples eligible for a part age pension with financial assets in the range of $350,000 to $830,000, the most certain investment return of 7.8 per cent a year is to use up investable assets as quickly as possible.
The lower the Reserve Bank reduces interest rates, the more attractive dissipating financial assets will become.
In this situation, the biggest losers are and increasingly will be non-homeowners. First, because the additional age pension available to non-homeowners doesn't adequately compensate for even modest private rental rates. Second, the owner-occupied home is exempt from the age pension assets test, thereby favouring retirees owning valuable dwellings.
The lower interest rates move, the greater the advantages of investing in the family home will become.
The severity of the assets test will encourage retention of the family home because downsizing generates financial assets which trigger the loss of part or all of the age pension.
Unless the government addresses the huge financial advantage of home ownership in retirement, future retirees will aim to own the family home outright rather than accumulate super and financial assets.
Low interest rates facilitate this aim and any outstanding mortgage at retirement can be paid off using employer superannuation accumulated during working life. With the actuarial value of the age pension for a married couple being close to $1 million, there will soon be more benefit from retiring with modest financial assets than from $1million in super.