Changes to aged pension asset test will make home affordability worse

David Middleton

People planning for their retirement might soon shun convention by upsizing to a more expensive home to improve their access to the Aged Pension.

Middletons Securities Adviser, Mr David Middleton, said the unexpected by-product of the taper rate increase would see savvy investors try to reduce the level of their assessable assets by moving capital to places where it isn’t assessed. An obvious choice will be to ‘hide’ the money in the value of their residence because the value of their residence isn’t counted.

The taper rate governs how much of the fortnightly pension payment is lost for each additional $1,000 of assets above the lower threshold. From the start of 2017, $3 of a fortnightly pension will be lost for each additional $1,000 of assets held above the lower threshold, and for a home-owning couple, the new upper threshold will be $823,000 as of 1 January 2017, compared to the current threshold of $1.15m.

In percentage terms the pension reduces by 7.8% per year on assessed capital above the lower threshold while you can only earn around 3% if you have funds on a term deposit. As a result you have more income if you don’t have the capital.

“Because the family home is not counted as an asset it means that this can essentially become a bricks and mortar bank account to be drawn against as needed,” Mr Middleton said.

“This might just ring the death bell on the days where an empty-nester couple chooses to downsize from the family home to something more manageable – and instead we may see them look to buy something that is actually more expensive,” he said.

“We can expect to see more and more cashed-up older buyers using their superannuation investments to outprice younger families for the conventional family home, and the other factor to consider is that a change in seller behaviour may very well stall this segment of the housing market, as older people choose sit on the family home rather than sell.”

“The Federal government has been highlighting what it considers to be good news from the budget, but changes to the taper rate will be cold-comfort for the estimated 100,000 people who now face the prospect of receiving considerably less aged pension or no aged pension at all,” Mr Middleton said.

“The bottom line, is that a home-owning couple with $800,000 in assets will soon see their Aged Pension fall by around $14,000, and that’s quite a bit,” he said.

“By increasing the value of their home by trading up or doing renovations they will get a lot of extra pension. For example, a pensionable couple with $800,000 in investment capital would currently get interest income of around $24,000, along with an Aged Pension of $14,000 – making for a total of $38,000 income.”

“Under the new rules their aged pension would all but disappear, but if they added $300,000 to the value of their home their interest income would fall to $15,000 and under the new rules they would have pension income of $23,000 – more than they’re getting now. Overall they get the same income as they are now, and have a nicer house to live in to boot.”

Mr Middleton said that tying up money in direct real estate may cause some problems if people want access to the capital, but the new breed of reverse mortgages may make this easier too.

“Instead of downsizing to increase their investment capital, investing some of their nest egg in a more expensive family home and drawing down on that equity as they need it through a reverse mortgage arrangement could well see them better off,” he said.

“This isn’t great news for the Federal Budget or for young families looking to move into the houses that the pensioner couples will now be gobbling up.”