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Government’s home equity plans could have big repercussions

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    Mike Callaghan’s Retirement Income Report has been seized by Josh Frydenberg as evidence that that the legislated Superannuation increase to 12.5% would, in fact, create an earnings shortfall of 2% over an employee’s working life, and accordingly, a hit to tax revenues.

    And with that news, the AFR has reported that the Morrison government is planning to make some major changes in the way we view retirement – most importantly with regards to recognising just how important real estate is in the retirement planning process.

    Frydenberg has focused on the home as a potential pension source – and that could mean a big change in the way we view reverse mortgages

    “The report points out how important home ownership is to people’s security in retirement,” he said. “It points out that around 76% of people over the age of 65 own their own home and that as a consequence, this allows them to have more discretionary income and it also provides an opportunity for them to draw down on the equity in their home in retirement."

    “Accessing small amounts of equity in your home can allow retirees to amp up their retirement income at a time when it suits them and amp it back down when they have more available money.”

    Noting the fact that the median age of homebuyers is increasing – from 24 in 1981 up to 33 by 2016, the report also recommended that it would be worth considering options to allow early access to super.

    “Some countries have a more open approach to early access to retirement savings. For example, in the US there is an option to access retirement funds early without any assessment of need, but the funds released are taxed as income at marginal rates plus a 10% penalty,” the report stated.

    Although the family home is currently exempted from the age pension assets test, the report points out that the current legislation allows tenants to have $210,500 of assets before having their pension cut, while the median value of a pensioner’s home is $560,000.

    “Exempting the principal residence may incentivise people to put too much money into their home,” the report stated. This may include spending more than necessary on renovations or choosing not to downsize to avoid reducing age pension payments when the equity is turned into cash.

    Any changes are likely to be introduced in next May’s budget – two months before the planned 0.5% hike in super contributions.

    Original Article