The government has made it abundantly clear retirees are expected to utilise their capital as they move into their final years. But the big question is how to do that.
One option may be to downsize, if you have that kind of a home, but the costs of selling and re-buying may well be close to $ 100,000. This means a big loss of money unless the move is essential.
Furthermore, releasing a big chunk of capital from your home could have serious implications on your age pension because you could be converting an exempt asset, your home, to financial assets which are assessed under both the assets and the income test for pension purposes.
One alternative is a reverse mortgage, whereby you make no repayments of interest or principal, which means the debt will increase faster and faster. If you take a fixed interest rate there may be hefty exit fees down the track, if you take a variable rate you could find yourself in strife if property prices fall.
Enter the Pension Loans Scheme: a type of reverse mortgage offered by the federal government.
The latest rules took effect from July 1, 2019 and enable a couple on the full age pension to receive an additional $ 718.10/fortnight ($ 18,670.60/year) between them by way of this loan. Drawdowns are paid fortnightly, like the pension, and the interest rate is 4.5 per cent. The loan can be repaid on demand without penalty, but it would be reasonable to expect that repayment would come from the sale of the family home.
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The amount a part age pensioner can borrow is the difference between the amount of the age pension they receive and 150 per cent of the maximum rate of age pension. For example, if a couple received a combined age pension of $ 800 a fortnight, they would be eligible to draw an additional $ 1354/fortnight ($ 35,212/year) under the scheme.
The Pension Loans Scheme is available to non-pensioners too. A self-funded retiree couple can draw 150 per cent of the maximum rate of pension, or up to $ 2154/fortnight, combined.
Paul Rogan, founder of Pension Boost which specialises in assisting applicants for the scheme, says while most applicants are looking to top up their age pension, the pandemic has driven an uptick in interest from self-funded retirees looking to supplement their income. A self-funded couple can now access up to $ 56,000 p/a under the PLS.
Borrowing money under this scheme may solve a short-term cash problem, remember the essence of a reverse mortgage is that no interest or principal repayments are made on the loan, so it increases faster and faster. The government is aware of this, and requires a valuation from a licensed valuer on the house which will be used as security for the loan.
Furthermore, the amount of the cumulative loan debt that can be accrued will be limited based on a number of factors, including the pensioner’s age and their equity in the asset. This maximum loan amount available will be recalculated every 12 months.
Keep in mind the essence of a reverse mortgage is that the retiree spends money now instead of leaving it to their estate. Family should be involved if a reverse mortgage is being considered – in some cases it may be better for the family to help.
NOEL ANSWERS YOUR QUESTIONS
I have been recently widowed after 65 years. We were getting a part aged pension but I think I am going to lose that pension as I will be over the maximum for a homeowner part pension. What are the criteria for a Commonwealth Seniors Health Card?
To qualify for the CSHC you must be of age pension age but not eligible to claim an age pension, and you must pass an income test. There is no asset test. The income test is $ 55,808 per annum for a single and $ 89,290 per annum combined for a couple. The income test will look at both your adjusted taxable income and a deemed amount from account based income streams. Based on the information supplied you should qualify easily. This is a timely reminder to all pensioner couples to arrange your estate planning if possible so the survivor is still entitled to a part pension if one of you die.
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I am confused about how Centrelink treats capital profits from shares. Suppose I sold shares which cost $ 75,000 three years ago and which are now worth $ 150,000. After application of the 50 per cent discount my taxable capital gain would be $ 37,500. Would Centrelink regard the income as $ 75,000 or $ 37,500. Or is it not assessed?
Services Australia General Manager Hank Jongen says the capital gain may be assessable for tax purposes, but not by Centrelink for the Age Pension income test.
The exception is if a person is operating a business as a share trader. They consider a person a share trader if they meet certain criteria. This may include the frequency and purpose of the trading, as well as how the person declares this income on their tax return.
I am 62 and looking to draw the maximum amount each year from my superannuation via TTR. When I reach 67 would Centrelink consider my reduced superannuation in the five years that I am drawing out via TTR as deprived assets? I am single homeowner with no spouse, currently working full time earning about $ 100k pa, with only $ 200k in super but looking to draw on super to reduce my home loan and renovate my house.
Spending money on reducing your mortgage, or renovating your home is not regarded as a deprived asset. The big question for you is the opportunity cost of withdrawing money from superannuation that could be earning 7 per cent per annum to reduce the debt that should be costing you no more than 2.5 per cent per annum.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au