Focus on lifestyle
JASON PETERSEN Jason is a Sydney-based financial planner and head of wealth management at independently owned boutique planning business 5 Financial.
With Sydney property prices showing solid growth in recent years, Michele’s question is not unusual. Financially she has options and, as we say to clients in similar situations, her primary focus can be on what’s important to her in terms of lifestyle.
You could nearly say that Michele is spoilt for choice, and it’s a matter of where her lifestyle priorities lie.
If Michele decides to stay in her home, she avoids transfer costs such as stamp duty and agent’s fees, which are probably likely to be in the vicinity of $50,000.
Under current legislation, the benefit of maintaining equity in your home is that you can expect a larger age pension as your home doesn’t currently count towards the assets test.
Michele has many opportunities to use super to further build her nest egg for the time she does decide to retire. In terms of performance, most super funds tend not to differ greatly, with the key drag on performance often being fees, transaction costs and unnecessary taxes, so it’s important Michele takes the time to identify the right fund for her.
Michele should continue to make the most of contributions. Being self-employed, maximising personal deductible contributions is crucial. With a healthy balance, Michele needs to think about taking advantage of the transition-to-retirement opportunity where earnings on the fund can be tax free.
Note, however, this is changing from July 1 and would need
to be reviewed at that time. If Michele does sell her home, the “bring-forward rule” is likely to be needed to maximise contributions to super.
Currently three times the non-concessional cap of $180,000 ($540,000) can be made, reducing to three times $100,000 ($300,000) after July 1.
A reverse mortgage used sensibly allows you to stay in the home and location you like. Ideally these shouldn’t be used until later in life once other assets, such as super, are exhausted. Major financial institutions offer reverse mortgages with interest rates ranging from the low to mid 6s, which is quite reasonable.
The key concern for anyone taking out a reverse mortgage is that interest is capitalised over a long period of time. This will eat into the equity in your home, particularly when rates rise. Under the National Credit Code, reverse mortgages must have a “no negative equity guarantee”, which means you can’t owe more than the value of your property.
With a current interest rate of 5.25%, Centrelink’s reverse mortgage is quite useful. Known as the Pension Loans Scheme, it’s available to those not receiving the full age pension. Its limitation is that if you receive the full age pension then you can’t access the scheme to improve your lifestyle.
Given her solid financial position and opportunities, Michele can choose to move or stay, and base her decision on what gives her the most satisfying lifestyle.