Should retirees have to use their homes to fund their retirements?

How we fund our retirements is changing. Anyone feel the winds?

We’re going to have to fund retirement for ourselves sometime in the future — that’s why superannuation was created.

Yet, most Australians facing retirement today don’t have enough in super to do that and rely heavily on the age pension. But what they do have, that future generations probably won’t, is a large family home built through decades of capital gains.

So, today we have to talk about that. Could today’s retirees live a better quality of life if they learned how to use the equity tied up in their home and the government supported them to do so? Are Australians ready to eat our homes in retirement?

Reverse mortgages have increased substantially as equity rich but cash poor seniors seek extra income.Credit: Getty

A discussion paper released by the Actuaries Institute this week called out the problem directly, saying we need to change the narrative and the policies that support it, so it’s more acceptable for today’s retirees to access and spend part of the equity that has been built up in the home.

The paper also called for a cap, which would be very controversial, that could be set at something like $2.1 million on the value of the family home considered under the assets test for the age pension.

It also called for greater consumer protections on home equity release (or reverse mortgage) products, improved equity in the rental system for retirees to make renting more palatable, and addressing the financial disincentives to access part of the wealth stored in the home, like a cut to stamp duty for people over 55 who downsize.

But most importantly, the report’s author, Andrew Boal, partner in Deloitte’s Superannuation & Investment team, says we need to change the awareness among retirees of how they could use part of the value of their home as a financial asset.

I don’t disagree. And before you joist me for it — understanding it doesn’t mean you have to like it or follow through.

“An extra $250,000 released from their home would make a huge difference to many people, and that would still leave 70-80 per cent of their home’s value for other uses, like funding their aged care, managing unexpected retirement risks, and leaving a bequest to their children,” Boal said.

Andrew Boal, Partner in Deloitte’s Superannuation & Investment team.Credit: Rhett Wyman

Most Australians in retirement, despite the affluent media rhetoric, are not living on millions of dollars, sitting by the beach, spending their kids’ inheritance. Quite the opposite. Most are living quite sensibly, some frugally, scrabbling together income from several sources to make ends meet, and finding clever ways to live a good life, if they can afford to.

Their income sources are limited, usually to a small superannuation fund, the age pension, and for some, an income stream from a rental property. Their superannuation balances aren’t large because most of their years of contributing to super were done at much lower percentages than today’s 11.5 per cent compulsory contribution rate.

And, alongside this struggle, 80 per cent of retirees own their homes outright, without a mortgage, and with decades of property price growth, that asset is valuable.

Most older people don’t see it as a financial asset or even an asset they want to contemplate using to make their standard of living better. Most see it as something they want to leave to their children in their will and, if they have to, use it to fund their aged care. And because our family home is exempt from the age pension assets test, no matter how much it’s worth, it has become a sacred cow.

But it doesn’t have to be like this. People can choose to downsize and free up capital for investing in income-generating assets that will fund an improvement to their lifestyle. They can also access some of the capital tied up in their home without selling it.

And the government could do more. What can people do now to access the equity tied up in their homes?

You can downsize and put money into superannuation tax-free

The government provides a generous downsizer concession to people who have owned their principal place of residence for more than 10 years and sell it to free up capital. You can contribute up to $300,000 per person ($600,000 per couple) from the proceeds of the sale into your superannuation, tax-free. This can then be invested and generate an income that can support your cost of living and lifestyle.

You can access an income stream, borrowing against the equity in your home

The government offers a powerful Home Equity Access Scheme, basically a reverse mortgage offered only as an income stream. They let you borrow against the equity in your home or other real estate you own in Australia.

The borrowed amount is paid as a fortnightly loan, either added to your existing age pension or as a standalone payment if you’re not receiving a pension. Interest is charged on the loan and compounds fortnightly. And the interest rate is 3.95 per cent, that’s more than 50 per cent below the commercial market for reverse mortgages.

You could draw a lump sum using a reverse mortgage or home equity

You could borrow against the equity in your home using a commercial reverse mortgage provider or home equity release company.

Many retirees can access some of the capital tied up in their home without selling it.Credit: Dorothy Woodgate

You need to be aware of the different offerings in the market and which ones are regulated properly. There are some pretty good safeguards in place from ASIC on debt products (like reverse mortgages etc.) that ensure limits on the amount you borrow and provide for your tenure in the home during your lifetime.

These differ from equity style solutions where a company takes a stake in your home, which are not as centrally regulated, falling only under real estate legislations.

And what could the government do to encourage us to use our homes more to fund our retirements? The Actuaries Institute paper has some good suggestions:

They could reduce the cost of downsizing

Downsizing is expensive. The cost of real estate agents, stamp duty, legal, and moving costs can hurt. Governments could support this by reducing stamp duty on transactions by over-55s who are downsizing.

They could ring-fence an amount released from the family home

The government could relax the age pension means testing rules for at least a portion of the value released from a protected asset, like a family home, ring-fencing it within a special designated account or through the purchase of lifetime annuities within 12 months.

The paper suggests the protected amount could be in the league of $300,000 per person ($600,000 for a couple) and could be excluded from both the assets and income tests.

They could cap the asset value protected under the age pension assets test

With property values skyrocketing over the past 30 years, there’s been a growing push to make the pension assets test fairer by gradually including the value of the principal residence above a reasonable threshold. Boal suggests setting a value should be open for consultation and different thresholds could be applied to different regions or postcodes.

And finally, they could continue the push for greater consumer protection of reverse mortgage and home equity release. These industries are much bigger in the UK, pointing the way to growth here too, over time, but not if we don’t make it safer, more transparent and easier to understand.

Ultimately, we need to stay informed, knowing how we fund our retirements will change as the pools we draw from shift from social security today, to equity released from housing tomorrow, and later, to a generation that has superannuation growing for their future.

Bec Wilson is author of bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is the host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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