The Government has legislated changes (effective 01/01/2017) to the asset thresholds used to calculate eligibility for the Aged Pension. Many pensioners with lower assets will benefit because of increases to the asset test thresholds.
HOWEVER more than 300,000 Age Pensioners will have their Age Pension entitlements cut, with just under 100,000 of those losing all their current Age Pension entitlements, due to reductions to the maximum asset thresholds, as follows –
- Currently $783,500 for a single homeowner – decreasing to $547,000
- Currently $1,163,000 for a homeowner couple – decreasing to $823,000
Example,- Is this you?
A home owner couple with modest investments – An investment property worth $350,000; $75,000 in the bank and $400,000 in their super account. You would currently be receiving a part pension of $224.00 / pf or $5,811 a year – each.
After the January 2017 changes come into effect, they will lose the whole of that part pension payment – entirely! This means that their household income will be reduced by $11,622 a year
Another example – is this you?
A couple with lesser investments – say $80,000 at the bank and $500,000 in their super account – you are currently receiving a part pension of $407 /pf or $10,589.p a each.
After the January 2017 changes come into effect, they will lose $5,343 of that part pension payment – entirely! This means that their house-hold income will reduce by $ 5,343.00 a year!
However, there is a further sting in the tail –
If one of this couple in the second example dies after January 2017, the remaining partner’s pension would be totally eliminated! That would be a reduction on today’s household income of $11,622 or post January 2017, $5,343.00
There are ways to reduce assets and minimise the effects of the proposed changes, including spending money on the family home; gifting some funds to family; or investing in a lifetime annuity.
Each of these options have limitations. Ie. gifting limits have limitations, fixed returns on annuities are significantly less than 5 years ago, as well as the obvious requirement to either remove funds from current investment or bank accounts into less profitable accounts; or to sell assets to generate funds to either gift, spend or invest in the annuity.
Another option
An Equity Release loan is a secured mortgage over your home, allowing home owners to access equity when and how they require , to meet their retirement needs.
However the big difference from a conventional mortgage loan is that you are not required to make regular repayments to the loan. These loans are specifically designed to assist older people (over 60 years of age) to better manage their finances during their retirement years.
The Queensland-based Director of Reverse Mortgage Finance Solutions, Peter Bolitho, said that he believes the Equity Release loan offers the perfect solution to those people who will lose part or all of their pension income after January 2017.
“The equity release loan can be set up to provide a regular instalment payment direct to the borrower’s nominated bank account. It is important to recognise that regular instalments that are spent and not accumulated, will not affect either the income or asset position of entitlements.
If we assume that the value of their home is $800,000 and they arrange the montly draw of $1,000 for 15 years, at the current interest rate of 6.5%, the loan would grow to $344,097.00 because of them having drawn $180,000 and the compounding effect of the interest .
The compound interest must be balanced against the compounding growth of the home, currently valued at $800.000. If we assume a modest rate of annual growth of 4% over the 15 years, the property would then be worth $1,447.358.
This is a growth in equity of $303,261,00 after the entire loan (including the $180,000 cash draws) has been repaid.”
Equity Release loans are the most regulated mortgage loan available in Australia, with specific protections for borrowers written into the Credit Legislation,
You must deal with an Australian Credit Licence holder or their nominee and your advisor should be accredited with SEQUAL. Equity Release Loans can be accessed by a lump sum withdrawal, (not recommended to replace income); by instalments or as a ‘line of credit’ This last option allows the borrower to access the funds on an ‘as required’ basis, or to choose not to use the loan in years of good investment returns.
Equity Release is a valuable component of any retirement plan, especially in times low or reduced income flows, such as the January 2017 pension reductions.
If you need to seek further information please contact your state based adviser at Reverse Mortgage Finance Solutions.