Should your home…
…be exempt from the assets test?
It’s no surprise that just over three-quarters of retirees own their own homes; traditionally Australians have had a love affair with home ownership. What is surprising is that the value of the home in retirement is so often understated or overlooked.
In fact, the possession of a mortgage-free home is possibly the greatest gift to anyone’s retirement.
There are many benefits to home ownership in later life, but here are what we believe to be the top three wins when it comes to funding your retirement:
- Capital Gains Tax exemption
- Asset test exemption for the Age Pension
- Home equity access
Capital Gains Tax (CGT) is a tax on profits made from buying or selling certain goods or services. These might be shares, commercial property, ownership in a business or works of art. Generally speaking, you will need to pay tax on the profit – or the difference between the purchase price and the sale price (i.e. the increase in value). The tax payable is reached by including the capital gain in your accessible income and applying the appropriate marginal rate. There is no such tax payable on the sale of the family home. All profits remain intact, but of course will be treated accordingly should they be invested in any way.
Asset test exemption
As most older Australians are aware, the Age Pension entitlement is worked out by means test, which considers both your income and your assets. The main exception to assets which need to be declared is the family home, which is 100% exempt. This means someone with low income and assessable assets could conceivably live in a $5 million home, or more, and still receive a full Age Pension.
Home equity access
Another benefit of home ownership is that you can dip into this form of wealth should you run out of savings.
We’ve written before on the fact that Australians do not actually ‘run out’ of retirement income as the Age Pension offers a safety net for all who fall within the income or asset thresholds. But for those who wish to live on more than the amount provided for in a full Age Pension (fortnightly $1064 for singles, $1604 for couples combined) those who own their own homes can ‘dip into’ these savings.
There is little downside to doing this by using either the Government’s Home Equity Access Scheme (HEAS) , one of the many commercial reverse mortgages or more tailored equity access schemes. Such schemes offer a way of generating funds while you are alive and subsequently leaving a smaller bequest when you die. Your relatives may not love it, but hey, whose retirement is it anyway?
Whilst home ownership does entail outgoings for property maintenance, you do not need to cover the high costs of rental accommodation. This puts you in a prime position compared to nearly 15% of retirees who are renters and who generally need to pay between 30 – 40% of their income on rental. Yes, there is support from the Federal Government in the form of Commonwealth Rental Assistance (CRA) which is currently $157 per fortnight for singles and $296 for couples, combined. But this supplement often does little to ameliorate the effects of rapidly increasing rents during a housing shortage, such as we are experiencing at the moment.
Then there are the other, emotional, costs associated with renting. These include the sorrow and dislocation when needing to move out of a much loved neighbourhood if prices become unaffordable or the stress and anxiety attached to not knowing if you will still be living in the same place in a year’s time.
Given the significant benefits that home ownership provides in retirement, even for those still managing a mortgage, it’s probably fair to ask whether this asset should remain exempt from the Centrelink assets test. There are clear cases to be made on both sides of this debate, but the team at Retirement Essentials believes that it’s time someone asked those most likely to be affected – retirees themselves.
We would love you to respond to this short two-minute Retirement Pulse survey and let us know your views. And if you would like to know more about home equity, including the benefits of paying down your mortgage, you can book a consultation below.