How the age pension distorts the housing market

Recent publicity about the possible adverse impact on pension entitlements of downsizing the family home has drawn attention to the problems that the age pension assets test creates for many current and future retirees. Almost 30 years ago following the Gruen Report, the government decided not to subject an owner-occupied home, whatever the value, to the age pension assets test.

At that time, home ownership levels were higher, housing was much more affordable and the impact of the assets test on home ownership was less significant. The situation has changed considerably, particularly in the major capital cities where house prices have risen dramatically.

The exemption of the family home from the age pension assets test makes retirees reluctant to downsize.

The challenge for retirees contemplating selling their house to move to age care or more suitable accommodation is now greater because of the recent doubling of the assets test taper rate from 3.9 per cent to 7.8 per cent. With interest rates at historic low levels, for almost all retirees subject to the assets test, the loss in age pension entitlement from selling a home exceeds the additional income available from investing the proceeds.

In effect, selling the family home to free up additional cash to live on can, and often does, result in a deterioration of a retiree's financial situation. Unless the surplus proceeds of the sale are not subject to the assets test, remaining in unsuitable and expensive to maintain family homes is the most viable financial option for retirees.

While many retirees are reluctant to do so, today's prevailing low interest rates have increased the attractions of obtaining additional cash to fund retirement via a reverse mortgage or drawing down funds in a mortgage offset account. The reverse mortgage option may be the only one available to current retirees owning their house outright.

But for those with existing mortgages, depositing money in mortgage offset accounts can be a superior option to paying off the mortgage. The account can then be used as a line of credit, providing funds at relatively low cost on an easy-to-access basis.

Although use of a reverse mortgage or offset account is sometimes criticised as eating into the equity of the home, such use for several years can help cushion the adverse impact on age pension entitlement in a downsizing situation. When a property is sold and cash received, there are few options to avoid the harsh and immediate impact of the assets test.

Retirees can only hope that a future government addresses the lock-in disruptive effect the asset test has on retirees' decisions to move to more suitable and affordable housing. Until then, planning ahead, including by the possible use of reverse mortgage and offset accounts, can help avoid and minimise the impact of the assets test on downsizing.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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