SCOTT FRANCIS - 20 MAY 2013
Summary: The latest federal budget unveiled a new government initiative to allow seniors to downsize their home and have $200,000 of the proceeds quarantined from the age pension assets test for 10 years. But those considering the option should weigh up the pros and cons before jumping through the door.
Key take-out: The proposed ‘House Help for Seniors’ scheme aims to incentivise retirees to downsize their home for the purpose of freeing up cash to fund their retirement. But the costs of selling a home and buying another are high, and will be potentially prohibitive for many.The budget has been and gone – and one change that has become more interesting to me the more I have thought about it is the ‘House Help for Seniors’ plan.
While there are many more details of this yet to be unveiled, the basics are that if you have lived in your house for 25 years, the government will allow you to ‘downsize’ your house and let you keep up to $200,000 of the proceeds in a special account that will not be counted towards the age pension means test for 10 years. Over that period of time, interest can be earned on the $200,000. The start date was proposed as from July 1, 2014.
Looking at it, the headline could be: ‘$1.28 million in assets for a homeowning couple – and still able to receive some part age pension’. The current asset limit for a homeowning couple to receive some part age pension is $1.086 million. Having $200,000 in a means test exempt account extends this further. And, with retirees having been battered by the global financial crisis, the idea of a greater asset base to support retirement will provide more financial confidence.
There has always been an interesting interplay between the age pension and a person’s ‘principal place of residence’. Because this has been exempt from the asset and income tests for the age pension, people have been encouraged to ‘store’ some of their wealth in a more elaborate home, where it does not impact their age pension. This proposed policy does the opposite – it encourages people to consider taking some wealth out of their principal place of residence, and (eventually) use it to help fund their retirement.
The cost of downsizing
Twenty five years ago, in 1988 – the length of time a house must be owned to qualify for the scheme – Bob Hawke was Prime Minister and the median house price in Australia was around $100,000. The current median house price in Australia is more than four times this amount. However, this does not mean that there will be plenty of value for people to withdraw from their house by downsizing – the key issue will be whether, after selling their principal place of residence and paying the associated costs, there will be sufficient cash left over to make this worthwhile.
There is no capital gains tax on the sale of a principal place of residence (assuming that this has been its status for the time it has been owned),so this is not a concern. However, other transaction costs may be significant – including stamp duty and normal buying and selling costs including agent fees, searches and legal costs. There will need to be a significant sum of money left after the costs of buying and selling, and the price differential on the property, to make it all worthwhile.
From a non-financial aspect, there are a number of factors at play. On one hand is likely to be the sentimental attraction of the family home. On the other is the chance to very deliberately buy a property for retirement – located near the services, transport and facilities you wish to access, with the home set up as you want.
From a financial aspect, things do start to look interesting. Having a substantial cash asset of up to $200,000 – that you know will be available in 10 years (and which you can access before if required, at which time it ceases to be free of the age pension means tests) – might encourage you to draw more heavily on your retirement assets. This suits the structure of many retirement income streams, with ‘account-based pensions’ allowing people to draw more funds if they choose. Drawing more funds in the early stage of retirement also makes sense, as this is when people can expect to be the most active.
There are a number of issues with the basic outline of the policy as it currently exists. The first is the assumption that people will be able to downsize and end up with a substantial sum of money to put away for 10 years. Given the relatively high costs of buying and selling (stamp duty, agent fees, legal costs, searches and inspections), there will be a challenge to end up with a substantial sum after downsizing.
The nature of this program would suggest that it is looking to help ‘asset rich and income poor’ retirees – that is people who have a significant store of wealth in their own home, but limited other assets to fund retirement. On this basis, it seems a shame to have up to $200,000 tied up in an account for 10 years. Allowing people to access the interest earned on these accounts over the 10 years might be a step to improving this situation – keeping the capital preserved while allowing the income to be spent to increase retirees’ access to income.
There is much detail yet to come around the ‘House Help for Seniors’ program. If it does make its way into law, it will provide another strategy that people might access to fund their retirement – especially those people feeling they could do with more income in retirement, and who would be happy to downsize their home to access it.
Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor.