A new home downsize incentive could reduce your age pension
A NEW incentive to tempt senior Australians to downsize their home could cost them their entire age pension. The dressed-up superannuation tax break, promoted by the Federal Government as helping housing affordability, risks leaving many retirees worse off financially and will mostly benefit wealthy people.
From July this year, people aged over 65 can pump up to $300,000 of the proceeds of selling their home into super without affecting other super contribution limits. However, the proceeds get counted in their pension assets test — while the family home is exempt — and could dramatically reduce their pension.
Single Pensioner Example
For example, a single pensioner homeowner currently receives the full $906.70 a fortnight if their assets are below $253,750. Assets above that reduce pension payments until it is cancelled when assets reach $552,000.
Financial strategist Theo Marinis said the super downsizing rules were “like a lot of changes they make — they sound good in principle but when you look at the devil in the detail in practice, it’s not as good”.
“Quite often they’re foolish changes, and this is one. It’s like everything they’ve done in the last 10 years — half-cocked,” he said.
80% retirees receive part or full pension
Australian Bureau of Statistics data shows almost 80 percent of retirees receive a full or part age pension. National Seniors chief advocate Ian Henschke said pensioners looking to downsize should seek professional advice or at least speak with a Centrelink Financial Information Service officer.
He said the changes would mostly benefit those with enough wealth to make them ineligible for a pension.
“A full pensioner or part pensioner, depending on their Super-tax break could cost retirees circumstance, could have their age pension reduced or cut completely.”
National Seniors is calling for up to $250,000 of downsizing proceeds to be exempt from Centrelink means testing.
Others have made similar calls, but seniors group COTA Australia’s chief executive officer, Ian Yates, said this could distort the market. He said the downsizing rules would “add another option” for retirees. “It’s going to suit some people but will be irrelevant to other people’s decisions, and
some people will downsize anyway,” he said.
Planning for Prosperity senior adviser Bob Budreika said transaction costs such as stamp duties and real estate agent fees could often make switching homes not worth the money or effort. “And I don’t know anyone moving home who says ‘I can’t believe it — all the furniture fits perfectly’,” he said.
RETIREES worried about tougher new age pension rules are trying to lower their Centrelink-assessable assets through buying funeral bonds and other strategies.
In a recent article published in news.com.au by Anthony Keane, several Financial experts including David Koch and Planning for Prosperity’s own Bob Budreika were interviewed on the impact of the impending Centre-link entitlements and in particular how these changes will impact pensioners
Jan 1 pension entitlement changes
In summary, from January an estimated 300,000 people will lose part or all of their age pension, while about 170,000 low-asset pensioners will receive a boost, as the government lowers the level of assets you can hold before pensions reduce.
Kochie’s video here provides a quick summary of the impact to pensioners, while the detailed article by Trish Power on SuperGuide provides more detail.
Planning for Prosperity senior financial adviser Bob Budreika believes many retirees are in for a nasty surprise in January when the pension changes hit.
“I think a big part of the population isn’t really aware,” he says. “Retirees who don’t have a financial planner don’t realise what they need to do.”
Don’t blindly reduce assets
However, Bob cautions people from blindly trying to lower their assets for the sake of preventing pension cuts, because the longer term cost of losing the assets may be greater.
“There’s an attitude with some people to do whatever they can to make sure they maximise Centrelink. Some of the decisions they make can be pretty silly,” he says.
“Look at two sides of the equation. Ask yourself “if I do tie up assets in a home renovation, funeral bond or gifting, what is it going to mean for my long-term financial security because that money is effectively gone.”
Centrelink changes to impact retirees
We usually discuss a range of financial issues in our monthly articles. This month we’ve decided to focus on the Centrelink changes as they will affect those retirees in your community or those that will be applying in the near future. Even if you aren’t receiving Centrelink you’ll appreciate the looming problem for many retirees.
Considering the significance of the changes to the Age Pension asset test from next January, we’re surprised that people are not taking action now to investigate solutions for what will be a major cash flow problem for many Centrelink recipients.
From 1 January 2017 the Age Pension asset test limit for a homeowner couple will be reduced from $1,175,000 down to $823,000. Currently a couple with $823,000 of assets outside their home receive a combined pension of $520.15 per fortnight or $13,523.90 per year. From 1 January 2017 this will be reduced to zero!
Single Aged Pensioners most affected
We believe that those most affected will be single Aged Pensioners, as their asset test upper limit will reduce from $788,250 to $547,000. This could mean losing $361.65 per fortnight or $9,402.90 per year in cash flow if their assets are valued at $547,000 on the 1st of January 2017.
The situation is even worse when a spouse dies. The remaining spouse becomes a single Aged Pensioner and the financial impact is even more severe. Assuming that person has the same assets as they did as a couple, they will be completely cut off if their assets are greater than the new maximum single threshold of $547,000 from January 1st.
Changes put pressure on retiree’s investment performance
The changes mean that many pensioners will be far more reliant on their investments to make up for the shortfall. These changes come at a time when interest rates are falling and there’s growing uncertainty with global financial markets. It could be a double whammy for many, especially single Aged Pensioners.
Pensioners will require advice around innovative and effective income solutions. The family home will become possibly their most important asset, especially in times of reduced cash flow and economic uncertainty. Many face reducing their living standard or fearing they live too long and run out of money.
Reverse Mortgage a possible solution?
One possible solution is a Reverse Mortgage, which is designed specifically for retirees where few other options are available. They can be designed to pay regular income, provide capital for those one off expenses, or simply as a facility to draw down on when funds are needed. Best of all, the loan can be set up to not affect Centrelink payments.
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This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances. You should read the PDS and consider whether the product/s is right for you. Past performance is not a reliable indicator of future performance.
Strategic Advice Solutions Pty Ltd (ABN 86 619 221 662) t/as Planning for Prosperity is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523