UNLOCK THE VALUE IN YOUR HOME

Using the money tied up in the family home, which is often the biggest asset for Australians, can provide age pensioners and self-funded retirees income for retirement.

Around 1.9 million age pensioners own property. The 960,000 pensioners who are renters are under huge financial pressure, with rents rising much higher than indexed rental assistance.

With prices in capital cities averaging $1 million for houses or $597,000 for units, there is plenty of capital to unlock. In Sydney, the average price for a house is $1.7 million and $713,000 for a unit. In Melbourne, houses average $1.18 million and units $585,000.

There are several ways to free up capital in your home. One strategy is to downsize and move to cheaper housing, unlocking some of the value. Another is to take out a reverse mortgage, where you borrow against the value of your home.

Rise Wealth’s Peter Humble says its capitalgains-tax-free nature incentivises Australians to store a great deal of their wealth in the family home. Being exempt from the assets test is attractive, too.

“The only problem is that they can’t sell part of it to buy bread and milk,” says Humble.

Retirees need to think of property as an asset – part of the pool of assets to be used in retirement, says Tim Wedd, executive director at Crystal Wealth Partners.

Sense of entitlement

He says Australians have a property-centric mentality. “There is a view that they are going to leave the family home to their kids.”

Often inheriting the family home is the only way adult children can enter the property market. Adult children can have a sense of entitlement that the house is theirs and it cannot be sold under any circumstances, not even for residential aged care when a frail or demented parent cannot safely remain in a home.

But the capital tied up in the house may be needed in retirement.

“For a large number of people, the house will be utilised in retirement. It can be rented or downsized, and the excess contributions can be moved into superannuation.

“Or the house is sold to help fund residential aged care when the higher ongoing costs of aged care come into the picture,” says Wedd.

You may have to fund unexpected emergencies, such as medical and dental expenses or house repairs, or you need to cope with cost-ofliving pressures. Or you want to improve your lifestyle, visit your grandchildren and travel.

“Retirees want consistent income. You can’t sell a bathroom to finance a holiday,” says Mark McShane, from Chrysalis Lifestyle Planning.

But selling the family home to downsize is an emotional decision. It can be a high-risk strategy, as smaller homes in the same area may cost almost as much.

Reverse mortgages

In contrast to selling and moving out of the area, a reverse mortgage allows retirees to stay in their family home and age in their community, close to their friends and long-standing services, such as their doctor and allied health professionals.

The reverse mortgage business is going through a revival, with new providers emerging. They include Boomer Home Loans’ Lite reverse mortgage, which had an interest rate at the time of writing of 3.94%.

“The extra income can give women and couples on the age pension the additional amount to get to the comfortable retirement standard,” explains Katja Hanewald, who is a research fellow at the UNSW’s actuarial and risk department and has researched home equity schemes.

A single person needs $45,962 and a couple needs $64,771 for a comfortable retirement, according to the ASFA retirement standard, a lot more than the age pension of $25,678 and $38,709.

“It allows people to age in place,” she says. Another reverse mortgage on offer to both age pensioners and self-funded retirees is the federal government-run Home Equity Access Scheme (HEAS).

Formerly called the Pension Loans Scheme, it has been around for 35 years, but has had a makeover in the past year, so it is more attractive and simpler to understand, says Hanewald.

The HEAS has lowered its interest rate twice. At the time of going to print it was 3.95%, substantially below the market rate for most commercial reverse mortgages. For

example, the Heartland reverse mortgage charges 5.25%. The HEAS has no ongoing fees, unlike other reverse mortgages.

It now also offers an increased drawdown of 150% of the age pension. It can be paid out as regular payments, and from July this year as a lump sum advance of up to 12 months of payments of up to 50% of the full annual age pension – $19,355 for couples and $12,838 for singles.

The amount advanced is then repaid by reducing the next 26 fortnightly payments or forfeiting the following year’s HEAS payments, explains Paul Rogan, CEO of Pension Boost, a private company that helps retirees access the government’s HEAS for a fee.

He gives this example:

Mike and Dianna, who are full age pensioners, are on maximum HEAS payments and need a $13,000 advance to repair their roof. Their HEAS of $744.40 a fortnight would reduce by $500 to $244.40. Or Mike and Dianna can take the maximum advance of $19,355 and have no HEAS payments for the next full year.

Just how much you can borrow depends on the value of your property and your age. You must be of pension age, which is currently 66 ½.

HEAS payments can be secured against the family home, investment properties and farmland.

Participants can stay in the family home and don’t have to repay the loan while living there or make any other payments. The debt is recovered when the property is sold or from the person’s estate. But repayments can be made on a voluntary basis at any time without fees or penalty.

Hanewald has studied whether taking out a reverse mortgage can improve the happiness of retirees by modelling a number of variables. She gave a presentation at the recent actuaries summit. She found that the additional income made most people happier, except for wealthy people, who tend not to need the extra income.

“If someone was to ask me whether they should use this scheme, I would say yes. It will make you better off,” she says.

Yet only 5500 people have taken out a HEAS loan. This is expected to increase as Services Australia promotes it.

Hanewald’s research found that most people should take out the maximum amount which, she says, is not that high. Ninety per cent of people do take the maximum.

Rogan says the typical age of retirees who approach Pension Boost is 72 years. He says they have been on the age pension for several years and need extra money for a broad range of reasons.

But financial planners such as Peter Humble say his retired clients aren’t interested in reverse mortgages.

He has seen instances where the adult children have found out their parents have taken out a reverse mortgage on the family home. It is a shock to the children that they are not going to inherit the home and they assert that the bank unfairly talked their parents into taking out a reverse mortgage.

But parents often want their independence from the family and don’t want to be a burden on their adult children, says Rogan.

“Kids get irate and sometimes force their parents to get out of the reverse mortgage.”

“Other parents tell us it is none of their children’s business, while others discuss the decision to take out a reverse mortgage with their kids,” says Rogan.

Humble worries that people who use a reverse mortgage are always paying interest. “Your life is all about paying interest. You spent 40 years paying interest to buy the house, then when you own it, you borrow against it and then interest accumulates for another 20 years. It is enormous what you pay in interest. Why would you pay interest for 60 years? I don’t think the maths support the idea at all.”

Annuities lock in an income

As interest rates rise, annuities may become more attractive.

The downside of living a long life is potentially running out of money just when you may need it most. You could be facing mounting medical and residential aged care costs.

The risk of outliving your retirement savings is known as longevity risk.

Just how you invest for longevity is complicated. “There is no magic product,” says Chrysalis’s Mark McShane.

There is always the age pension as a safety net to fall back on when your money runs out.

As well as account-based pensions, which are subject to market risk, inflation risk and

longevity risk, there are longevity products designed to provide a guaranteed income for a certain number of years or for the rest of your life.

The Actuaries Institute’s Andrew Boal says superannuation funds should consider offering members a risk-free retirement income stream as well as an account-based pension.

“An inflation-linked annuity addresses the three main retirement risks. It also automatically measures retirement income in terms of an annual level, which can align with the retiree’s ongoing living costs.”

Australians could exchange superannuation savings for longevity insurance that would pay a guaranteed income. Some retirees are already investing in annuities.

But annuities haven’t been popular because the returns have been low.

Crystal Wealth’s Tim Wedd says the rates from annuities aren’t high enough yet. In the early 1990s, annuities paid out in the order of 14%, and if you could lock in a rate like that for life you could do very well.

“Annuities are not particularly attractive,” says Humble. “Not only have the returns been hit by ongoing low interest rates, the removal of full exemption from the assets test almost killed them.”

McShane believes that as interest rates rise, annuities will start coming into their own.

Annuities are less flexible than an accountbased pension, but you have certainty about your future income. “You are trading away that money if you get run over by a bus tomorrow as you don’t get that money,” says Humble.

Consistent and sustainable

By pooling money in an annuity, people who die early fund the income stream for people who live a long life.

You can buy an annuity that reverts to a beneficiary, such as a spouse. Often it is at a reduced amount of, say, 60% of your income stream. It can be paid out monthly, every six months, or annually.

Humble views annuities as long-term investments that do address longevity risk. If someone lives to be 100, he says, their account-based pension will probably run out, but annuities will keep paying an income.

Boal says there is nothing wrong with accountbased pensions, but a flourishing Retirement Income Covenant (the new requirement for superannuation funds to focus more on retirement) needs more alternatives to cope with the risks in retirement.

Humble agrees. He would like annuities in his financial planning toolkit and in many cases to run it as a complementary product alongside a person’s account-based pension. He says the account-based pension and family home could be left to the kids when retirees die.

Boal says annuities provide a more consistent and sustainable income. They could provide people with the confidence to spend throughout their retirement rather than scrimping and leaving super when they die.

As well, Humble says they could help people who are inclined to burn through their savings in several years.

He says if the children of Depression era parents who have thriftiness ingrained have an income from their annuity guaranteed, they have the emotional permission to spend.

Financial planners such as Humble recently received a circular from ASIC expressing concern about retirees’ longevity risk and said planners should not only be focusing on short-term needs but rather what people need over the long term.

Humble says he would like to see the reintroduction of the full assets test instead of the current 60% level that was introduced in 2019. “An income stream ceases to be an asset.”

From 2019, 60% of any payment from a lifetime income stream is assessable as income for social security purposes. Also, 60% of the purchase price of a lifetime income stream (including a lifetime annuity) will count as an asset through to age 84, when it drops to 30% of the purchase price.

Humble says he believes he could convince more people that annuities are a sound longterm strategy if it has a 100% exemption.

Wedd says if the market risks unnerve you, then you can always stack your account-based pension with conservative investments.

He prefers the flexibility and access offered by account-based pensions. It allows you to tweak your money. “Say your daughter is getting married in a year or something else crops up.”

It’s worth seeking advice

Retirees can use different combinations of products to suit their circumstances, taking into account the likelihood that their income will fall below a “risk-free” level and how much they are potentially rewarded for taking on additional risk, says Boal.

“If you could get an extra $600 per week for the rest of your life, it is a profoundly better idea than walking out the door with your superannuation and buying a $150,000 LandCruiser,” says Humble.

There are annuities that are linked to shares and other growth assets. They give investors the confidence to remain invested in the sharemarket rather than putting their money into safe but low-return asset classes, such as cash.

But annuities are complex products. There are inevitable trade-offs between the form of the longevity guarantee versus the cost.

The administration and investment management costs can add up to a sizable amount.

Often good financial advice is needed when considering longevity products and comparing the differences to find the one that meets your needs. Advice can help tell you the optimum time to start an annuity, too. M