Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 431

Stop treating the family home as a retirement sacred cow

For individual Australians, a reasonable standard of living in retirement can only be achieved with appropriate accumulation and decumulation solutions. As the Baby Boomer generation continues its transition into retirement and life expectancies rise, we must be open-minded to ensure we have the retirement solutions to meet retiree goals right to the end of their days.

-----

Better retirement outcomes are achievable if we stop treating the family home as a sacred cow. One of the big blind spots we have in the retirement income system in Australia is homeownership and the family home in particular.

About 76% of people over the age of 65 at present in Australia are homeowners, but that disguises a large number of renters and an increasingly large number of renters who are moving across from working life to retirement. About 12% of those over 65 currently rent and another 11% live rent-free or in residential care.

One of the features of Australian households when we look at their portfolios is that for the majority, particularly above the first quintile of wealth, the family home is their largest asset, and it's also the least likely to turn into retirement income. It's the aspect of their portfolio that is perhaps the most difficult to deal with when people come to retirement and the least likely to receive attention.

The three ‘Ds’ of homeownership and retirement incomes

When I think about the way that Australia deals with homeownership in relation to retirement incomes, I would give it a grade of D, and that's not D for a distinction, that's D as in A, B, C, D, next letter E. And my concerns in relation to housing and the way that it's treated in our system can be considered as three ‘Ds’: first is distortion, second is difficult decumulation and third is denial.

1. Distortion

In an efficient economic setting, renting and investing would be equivalent to investing in an owner-occupied house. I would be neutral, setting aside my personal preferences, to whether during my working life, I rented a house and invested elsewhere, or bought in an owner-occupied home. But we know that for many reasons in our system, homeownership is very attractive. I think that there are four things worth highlighting.

First, it’s often overlooked that mortgages give households access to leverage that isn't available to them to purchase other types of assets. During our working life, the big loan that most of us attract is to purchase a house, and that's a huge advantage to those who have sufficient income to support mortgage repayments. It’s a critical way that young households can leverage that human capital.

Second, homeownership is very attractive and excessively attractive in Australia due to unique tax advantages, obviously around capital gains.

Third, over-investment in housing is supported by the means test exemptions through the social security system partly while people are working and certainly after their retirement. These regulations also discourage downsizing once people have moved into the retirement side.

Fourth, mortgages offer households a special type of savings precommitment device that shares a lot of similarities with the mandatory superannuation. This precommitment device is a way that households get around their own impatience and tendency to spend too quickly and rather, preserve wealth for the future.

The overall goal of the retirement income system is to allow people to reasonably maintain their working life standard of living during retirement. Achieving this goal is much more likely for homeowners than it is for renters.

So one of the areas of obvious attention as our population and asset structures change is that more people are moving into retirement, and homeownership causes a great deal of inequality. Even if homeowners and renters manage to accumulate similar amounts of wealth, they are treated quite differently by the retirement income system.

2. Decumulation difficulties

The second ‘D’ are the difficulties in decumulation. The intention of the retirement income system is to provide an income in retirement, but our system means that the most valuable asset in household portfolios is inflexible when it comes to supporting consumption. We also have these increasing trends to later entry to the mortgage market which means that people are bringing debt into their retirements. So our other financial assets, which are fungible, are being used to pay off debts associated with a very inflexible asset.

This lack of liquidity encourages households to use houses to save up for major contingencies like costs of aged care or indeed for bequests. Storing up wealth in houses for those major contingencies also highlights further inadequacies in our system. Our insurances around these big risks are not very well developed. We don't have good products to provide for the needs of aged care and other expenses that means houses are used by households to cover them.

3. Denying the role of the home in retirement income policy

And the final ‘D’ is denial. This is the largest asset in most household portfolios but so far it hasn't attracted much attention, either explicitly in retirement incomes policy or in product design from the industry. We know that the Retirement Income Covenant allows superannuation fund trustees to use homeownership as a characteristic for distinguishing between cohorts of members, but things don't appear to be changing in the product space. Most of the products that are coming to the fore do not directly address or model homeownership as part of the wealth management strategy that they're addressing.

That’s three ’Ds’: distortion, difficult decumulation and denial. There's an elephant in the room that we really need to address.

 

Susan Thorp, PhD, is Professor of Finance & Associate Dean (Research) at The University of Sydney Business School (Sydney). This is an edited transcript of a talk as part of a session called ‘Better retirement solutions are the means to the end’ on 25 August 2021 for the Portfolio Construction Forum.

 

63 Comments
Nabley
November 05, 2021

Perhaps there is an inbetween way. We all need to live somewhere and most of us in retirement have sweated blood to achieve mortgage free home ownership. Most of us came to where we are, without inherited wealth. Inheritance, really is not a dominant issue. What is an issue is cash flow and having a roof over our head. The system needs to create incentives for us to release capital. Perhaps one way would be to preserve benefits on property to a certain value, beyond which there are no free rides.

Dudley
November 06, 2021

"create incentives for us to release capital":

Or, a step earlier, treat the cause rather than the symptoms: destroy incentives for impounding capital in homes.

Age Pension for all age and citizenship eligible.

Inheritances will still be accumulated but not so much in homes.

Ian
November 09, 2021

This is a contentious area for older wealthy Australian’s, but Nabley’s solution is ideal. I would add to their idea that the value (amounts above would be included in any means test) should be the median value plus some leeway, say 20%, for the particular state. The details can be debated, but the idea is sound and may have more support than people think.

Suzanne Spiers
November 02, 2021

We all need to live somewhere and as a single, now retired woman, with a grown child, superannuation was not supported in the 1970s for women who were advised to take on Provident Fund instead of super because 'you will get married and leave the workforce.' That was not true! Then there was motherhood, which meant having to combine part-time work with parenting. Men simply kept working and amassing super.

I am now retired and have some super, combined with a part pension. I am still paying off my mortgage and did not puchase my first home until I was nearly 50. I worked very hard to save for the deposit and to pay down the loan. I deserve to keep my home and have paid taxes all my working life. I do not feel guilty for being a home-owner!

I am glad that I have the security of my own home where the mortgage is almost paid off. I do not have the constant worry of rising rents or having to move constantly with a huge lack of available and affordable rentals and huge waiting lists for public housing. I took full responsibility for ensuring that when retired, I would have a secure home. I, like many other retirees, I made many personal sacrifices so I could have this secure home.

My home is modest and I have a garden and my dogs and cats. I do not live a luxurious life-style but can pay the bills and sleep at night, anxiety-free.

All people deserve a home and during my working life, I worked very long hours and focussed on paying down the mortgage. Whilst some retirees are wealthy with a lifestyle to match, most are not, and have worked very hard to put aside funds for a housing deposit and diligently paid off that mortgage.

So solutions to the current housing crisis and retirement housing options are needed. However, suggesting that retired people who have one home in which they live, should be relinquished to make way for younger people, is unfair. We deserve to live securely in the homes we have struggled to purchase and pay off.

Geoffrey Oliver
November 03, 2021

I agree with your comments Suzanne with the exception of your gender swipe at men.
I understand that parenting is and should be a priority for couples but it does not mean that it has to be the wife who takes on a part time role.
If they were honest a lot of mums would admit that the wonderful experience of spending time with and watching your child grow is much better than working full time.
Men who miss out on this and work long hours to provide for their families are now told that you kept working to grow rich which is a mean spirited way to dismiss this sacrifice.

Barbara Thomas
November 06, 2021

Geoffrey, it is a great loss that men keep working and miss out on so much precious time with their children. For various reasons, men are still progressing and earning more than women in the workforce, which causes the labour division of men working FT and women PT or not at all. In cases of divorce Super is shared between parties. But for those single parents, who never seem to be able to make the other parent pay their fair share, it must be so hard.

Sue
November 04, 2021

I agree with you it is hard especially when my husband and I made a choice for me to stay at home until my boys went to school which was rewarding but hard when our income was low then I went back to work part time, I have lost my job so I am now retired with not much super and we manage thank goodness we have our house or we would be on the poverty line like to many retirees.

Robbo
November 04, 2021

I am single (divorced) and live a single life in the modest single property I own. A lot like Suzanne and almost all other people I know of similar age that rely on a pension as their source of income along with a modest superannuation benefit, and, are also home owners. We are NOT rich or even comfortably off. That's why this article is nonsensical.

Robbo
November 04, 2021

Well put Suzanne. I too worked hard for the houses I owned in my working life and there wasn't many. I only acquired my first home in my early 40's and my last residence in 2015 that I still live in and all of them have been modest in size and amenity. This article is a little bit of Socialist rhetoric that espouses wealth redistribution by suggesting the problem and the fix is making older Australians sell their homes and move into aged care or go backwards into rented accommodation with all its' uncertainties. We certainly do deserve to live securely in retirement in the homes we "struggled to purchase and pay off." These ideas are only put forward by those who have never owned property or will be uneffected,or, those that could buy a residence in their working life but chose not to for whatever reason.

Rae
November 02, 2021

Don't think we should confuse the family house which is an economic entity, with the family home which may have social value beyond the dollars it could be sold for.

jimako
November 01, 2021

Or how about something completely different. Let retired people sell their homes and don't count the proceeds as an asset under assets test for pension purposes. They could then downsize to a smaller and cheaper home and put a chunk of money aside to help them live on the meagre pension, or help kids (or grand kids) with a deposit.

Sanchia
November 08, 2021

I think you can downsize and in doing so at retirement are allowed to put a sizeable chunk of the money realised into superannuation - 300,000 per person I think. Part of the challenge is with rising prices downsizing can mean more expensive.

Stuck
October 31, 2021

What seems to be forgotten when everyone talks about home ownership is that for many, it's the bank which still 'owns' the home, even after retirement! Paying off a mortgage for several years into retirement is not easy but as with all things involved with home 'ownership', people do it because it's important to them. The saying "asset rich, cash poor" comes to mind. We have to remember that just because someone is a home owner does not mean they have free money.

BP
October 31, 2021

Am I reading this correctly?
Two scenarios:
1) work hard
2) bludge

Option 2 receives MORE government benefits.
I don't understand why this would be true, because it seems to encourage people to bludge.
Why does the government want more young people to bludge?


Bruce Alan
November 21, 2021

In the midst of a most civilised discussion around a very thoughtful article, sadly, comes a poorly thought out, polarising comment. Consider the following…

1. Few people are aware, but the amount of money the government loses on taxation deductions granted to superannuants far exceeds what would be the cost of universal retirement pensions.

2. Australia shifted from being a modestly fair and equitable society prior to the turn of the century, to a grossly inequitable one…with more to come, solely as a result of four taxation benefits granted to property investors.
Firstly the 50% capital gains deduction after 12 months, secondly negative gearing deductibility, third, the enormous tax benefit given to the hyper wealthy to put hundreds of millions of dollars in taxation-protected super by then Treasurer Costello…and finally, the ability to hide the financial benefits of investment property inside tax reduced super… not to mention the ability that then gave them to outbid first home buyers.

3. The real Bludgers as you call them, are those who bludged on the taxation system to avoid their fair share of taxation granted to them by Howard-Costello ….to create the inequality that Australia faces now and in the future.

Dudley
November 21, 2021

"to a grossly inequitable one":

Blame (re-)globalisation and especially interest rates.

To simplify to essence, imagine a sudden shift in only interest rates, what would happen to home prices and time to save or pay off mortgage?

$100,000 income, 30% of income mortgage payment, 10% nominal interest rate, 20% initial equity:
= (100000 * 30%) / 10%
= $300,000 home price
Time to pay off:
= NPER(10%,-30000,(1-20%)*300000,0,0)
= 16.9 y

$100,000 income, 30% of income mortgage payment, 2% nominal interest rate, 20% initial equity:
= (100000 * 30%) / 2%
= $1,000,000 home price
Time to pay off:
= NPER(2%,-30000,(1-20%)*1000000,0,0)
= 38.5 y

Peter
October 31, 2021

Where does this increase in taxation go? How about people being held responsible for their own welfare. I think some people should accept a lower standard of living commensurate with their contribution to building this country. As for me, I have worked for many years in a very stressful job to provide for myself. Give the workers of this country a break.

Jack
October 30, 2021

The family home is an inheritance underwritten by the taxpayer.

By good luck or good management, Mum and Dad, bought a house on a large suburban block in an innercity suburb of a major capital city in the 1960s. On retirement, both parents were eligible for the full pension because the family home is not an assessable asset.

By good luck or good management, the family was able to place Mum, in her 90s, in a nursing home just before the rules changed in 2014. There was no need to pay an accommodation bond and the family home was not counted in calculating her fees.

On Mum’s death, the size and location of the property made it a developer’s dream. It sold for $2.1 million. There were three adult kids, each one was already retired and independently wealthy. Each adult child walked away with $700,000, tax-free, while the taxpayer paid for both parents’ age pensions and Mum’s age care.

No one is suggesting that this family is not entitled to the wealth they have created in the family home by good luck or good management. It has real monetary value as the three kids have discovered, but aging also incurs real costs. Families that accumulate their wealth in assets other than the family home, already share these costs, but families with valuable family homes do not.

Some of the costs associated with aging could be recouped from the estate. Then there would be no need for an assets test and no one would be forced to downsize to release any funds. It would all be completely voluntary. Of course, it would mean less inheritance for beneficiaries but that might also change behaviour. Taxpayer support in old age would become less of an entitlement and more of a personal cost that needs to be taken into account.

Pamela
October 31, 2021

I completely agree with Jack. My mother is in a similar situation but despite her teacher’s income, retired with a valuable home and share portfolio because she made many lifestyle and financial sacrifices. She could have reorganised her assets to claim the pension but didn’t so not only did she save tax payers the cost of her pension, she also pays income tax. Now she is 102 and in aged care, paying just under 4 times the fees of most other residents. I’m bombarded with correspondence from Centrelink requesting me to disclose her financials “to reduce her fees” but she will pay additional fees (to the government) until the lifetime cap of $69,101.75 is reached. Apparently this situation is unusual. My situation is similar and I don’t want the government to support me either however, I do believe there is merit in recouping welfare payments from the estate. My mother’s estate would be substantially larger if she had reorganised her assets to qualify for the pension and associated benefits and that would pass to me at the expense of taxpayers. In my opinion, that is morally wrong but is the current default situation.

Max Williams
October 31, 2021

Just wait till I die before you push that agenda. I feel a bit Kerry Packer, "I've seen what the sods do with my taxes and I ain't giving them any more than I absolutely have to"

Annon
October 31, 2021

Could the system calculate the cost of retirement support and charge the estate after those individuals pass. If the estate cannot cover the cost, then the state incurs any residual.

Kerrie May
November 03, 2021

Couldn't agree more. Tax payers should not be funding peoples inheritances. Anyone with a house above the median price should not be getting a pension in my view.

Constantine
November 03, 2021

Please note the following information https://www.firstlinks.com.au/age-pension-not-welfare

Graham Hand
October 29, 2021

On the "I've paid my taxes, I deserve a pension" argument. Well, lots of people pay taxes and never go on welfare. Noel Whittaker wrote an article in 2015 refuting the claim that a proportion of taxes was once paid to a personal welfare fund. He concluded social security benefits are paid from Consolidated Revenue and "no taxpayer had a separate balance in their own name, so there was no possibility that monies paid in would be allocated to a particular contributor."

David Close
October 31, 2021

I agree. Taxes are paid for benefits received at the time of payment i.e. hospitals, roads, police, defence etc, not put aside for retirement pensions many years later.

Kerry
October 31, 2021

There was a separate consolidated pension/welfare fund from 1945 where a percentage of the income tax paid was a social services contribution. This was changed in 1950 and all social services payment were again made from consolidated revenue. it is correct that it was a personal fund but it was a separate fund for social services

Glenda
November 04, 2021

Yes, their taxes paid while working don't go into a slush fund to await a claim for unemployment or pension down the track. Those taxes pay for govt services they are using like health, education, roads, public transport etc.

Dudley
November 05, 2021

"not put aside for retirement pensions many years later.":

Quite so. Part of the tax receipts are immediately used to pay Age Pensions.

"Those taxes pay for govt services they are using like health, education, roads, public transport etc.":

... and Age Pensions. $70G / $500G = 14%.

Russell Buckley
October 29, 2021

The original age pension scheme was a percentage of income tax was set aside to cover the cost, which government changed the rules to send that money to the general income account. if the rules had not been changed the aged pension would be self funding as some superannuation funds are. 

Former Treasury policy maker
October 30, 2021

Russell, whatever the politicians said about the scheme, it was NEVER actually a funded scheme, with the amount to be paid out depending on how much was in it, nor was it invested to earn a return to grow. It was thus in reality always a consolidated revenue funded scheme, so it was spin and marketing that got dropped, not financial reality.

Jan H
October 29, 2021

When I lived in Canada in the 70s, mortgage interest was tax deductible. Don't know if it still is. Taxes were lower and wages higher than the Australian equivalent. However, there was a sales tax (about 2.5% back then if my memory is correct), in some provinces only, like our GST. However, everybody had about 2% deducted from their wages which went to the Canada Pension Plan. Once eligible for the aged pension (65) you automatically get a govt pension based on years worked. Because. I worked in Canada, I get a small pro rata Canadian pension even though I now live in Australia. This is due to the reciprocal pension arrangements between countries. However, being a non-Canadian resident, 15% tax is deducted but I am able to get a rebate under Australian tax law. I am not eligible for an Australian govt pension and due to Centrelink bureaucracy would not want one, if I could help it. Applying for my Canadian pension involved filling out a form, which they sent me even though I had not lived in Canada for 30 years. My pension is paid monthly into my designated bank account and lasts until my death. It is a very uncomplicated system. 

John Pracy
October 28, 2021

Include the family home in the Centrelink assets test and adjust it's parameters, to give equality to homeowners and non-homeowners. Nobody can be forced out of their homes under this system.
Tax income received on Super funds in retirement phase. Why should retirees pay no tax on retirement income and yet struggling young families have to pay tax on their wages, which in turn supports the welfare system and the health budget that older people benefit from more.
The above sensible measures are unlikely to be implemented because it would be political suicide when you look at the percentage of homeowners to non-homeowners and the clout of the grey vote.
Therein lies the problem.

Old Fart.
October 29, 2021

Federal Budget repair is required but rather than attack the age pension which is around $25k annum at present, reform tax havens such negative gearing and family trusts.

Claudia
October 30, 2021

If you actually calculate all the benefits struggling young families receive from the government eg. Family tax benefits A & B and child care subsidies. Middle to low income family actually get more in benefits than the pay in tax. So your tax don’t even cover what you receive.

Older taxpayer
October 30, 2021

Older pepole have been paying taxes for 47 years by the time it's time to retire. You pay income tax a Medicare levy and then are taxed on earnings from super. Taxed on any bank or dividend interest. That's why after contributing to society for so long they are not taxed from super earnings when retired. I hope this is clear enough for you.

Donna
October 31, 2021

John Parcy, retirees pay tax on the money when it goes into Super, they get taxed on the earnings and now you want them to get taxed when they take their own money out ?? Wow

Michael
November 01, 2021

Super is taxed when it enters your fund. So called struggling young families get generous child care rebates up to $200,000 income we never got. We still survived. Many young families have horrific mortgages where they can't survive without government help, paid maternity and paternity leave because they live above their means. If they moved down one or two post codes, they could probably stand on their own two feet.

Suzanne Spiers
November 02, 2021

By doing as you suggest, and including a home that may be modest and still in the process of being paid off, would make life very difficult for those who worked very hard to stay off social security whilst raising children, paying mortgages off at great personal sacrifice, and paying taxes for their entire working lives. You are incorrect that no tax is paid on super payments drawn down as a regular allocated monthly pension payment. Many retirees have some superranuation and receive a part-pension. We retirees did as you are now doing; working hard and paying taxes for many years to support the welfare system. I am very glad that the Australian Government has allowed me as a single aged pensioner, to keep my very modest home that I am still paying off, due to women not having ANY superannuation until it was mandated by the Government when most women now receiving the aged pension, were raising children, had our working lives interrupted by having children and yet women were paid only 75% of what men doing the same work, were paid. Men's lives continued and were not interrupted by the arrival of children. Are you aware that the biggest demographic of homeless now, is women over 55. One day you will be a retiree and hopefully you will own or be paying off your home, ad I currently am. I hope that you are allowed to keep your family home, exempt from the means test. Just imagine living on $960.00 p.f. and either having insecure housing or having to pay at a minimum, $350.00 p.w. for rent. Do the math! Not much left over for food and utilities out of $960.00 p.f.

Old Fart.
October 28, 2021

If we force people to sell their homes as they can't access a pension whilst owning one, then the rich will snap them up and use the tax haven of negative gearing to accumulate a smorgasbord of property. So all this would do is make life harder for older people.

Tles
October 28, 2021

do not forget the value of elderly people remaining in areas where they are known and know others, have long standing help from doctors, dentists etc whom they have been under for years and who understand their needs, Have well known routes enabling safe driving or public transport, and all the social contacts that help prevent dementia. Sale of a family home provides for aged care, alternatively much of it is spent in trying to downsize to a small house or flat within the known area if this is even possible, most friends I know have had to move to assisted living style housing rather against their first wishes. 

Carlo
November 04, 2021

I understand the economics of the article but life isn't all about economics thank heavens! Most of us buy build our homes at considerable sacrifice by saving, own improvements etc. We do that because our home is where we'd like to be on it closing - with its memories, familiarities and securities. Our children recognise this too. And we don't stay there to watch it's value rising - but because it is HOME with all its memories, work put in et al. It will hopefully too be the place where we can stay and have paid for meals and upkeep done for us instead of going into care. Carlo

Michael O'Hara
October 28, 2021

The comments to this article highlight just how much emotion is attached to the issue of home ownership in Australia. Add in the wide interpretations of Age Pension entitlements, and it becomes easy to see why nothing changes in this area.

There are obvious advantages to society and the individual in home ownership. That is a separate argument to anything to do with the age pension.

"I've paid taxes all my life" is a nonsense. IF we had all paid sufficient taxes THEN Australia would not have a national deficit. Fact is, nobody has paid sufficient taxes. You may have paid your share but that doesn't mean you or anyone else is 'entitled' to an age pension simply because you paid tax. The government may mismanage and misspend the tax dollars but that is another argument again. Paying taxes is almost seen as a stupid strategy in Australia, rather than being seen as making a positive contribution to society. Perhaps we could put some thinking effort into how best to socially reward those who pay the most tax? Your personal reaction to that suggestion will probably highlight just how much preconceptions distort logical debate on these issues. Regardless, paying taxes does not mean you are entitled to a lifetime pension.

The Age Pension is a benefit voluntarily bestowed by a wealthy nation on its less financially fortunate citizens. The pension costs the country a lot of money, so there are limitations to how much is available to distribute and the country must decide the principles on which it manages that distribution.

The comment from 'Cam' highlights the wealth and social disparity that can arise simply because of where a person happens to live. Two different families working hard, being good contributing members of society, yet with vastly different outcomes. If X has a $2m asset and Y has a $400k asset, why are they being treated the same in an assets test? That's a perfectly logical question to ask.

And this isn't some "leftie Commo plot" to kneecap the tall poppy bourgeoisie and empower the down-trodden proletariat. Any such assertion is simply another example of personal perspective getting in the way of logical debate.

The Centrelink Age Pension Assets Test exemption for the family home is a distortion. But it is not one that is easily fixed. There is a lot of emotion to distract from key issues. But some of those emotional issues have genuine merit in a logical financial analysis from a total society point of view. It is not a simple yes/no argument.

There is a uni doctorate thesis required simply to come up with the list of questions required to start a logical debate. For example, is the Age Pension a social 'safety-net' or a recognition of taxes paid? What system will be the simplest and cheapest to operate, while still delivering efficiently and appropriately (in other words, how do we minimise economic loss from bureaucratic inefficiencies)? Where does generational wealth transfer come into the equation and should it even be part of the debate? What role exists for private +/or public insurance options to fund the uncertainties of age care and longevity?

Until the fundamental issues surrounding home ownership and age pension entitlements are correctly stripped of their emotive content, nothing will be changed and current inequalities and disparities will continue.

I'm not holding my breath.

Dudley.
October 28, 2021

"home ownership. That is a separate argument to anything to do with the age pension. ":

The two are linked by Law through the Age Pension Asset Test. For home owning senior couple, reduction and conversion of assessable in the range from $891,500 to $405,000 to non-assessable home improvement asset results in a tax free, life long, government guaranteed 8% return (Age Pension) plus ~6% rent and capital gains free return.

"The Age Pension is a benefit voluntarily bestowed by a wealthy nation on its less financially fortunate citizens.":

New Zealand, and others, bestow on all - including those why actually did pay for it all.

Chas Greenway
October 28, 2021

Australia has a national deficit because politicians spend more that what is collected via the tax system.
The elephant in the room that few if any articles ever mention is the back to front way we tax superannuation. Smart countries tax super once , and that is at the retirement stage when you start drawing down your pension. It is then taxed at normal rates. Australia taxes super up front with the contribution tax , and while the fund is earning in the accumulation phase. We also tax super in the pension drawdown phase if you have more than the current cap . This ensures final balances will be much lower.

Tom Taylor
October 28, 2021

This is spot on. Our super is taxed when it goes in and is taxed while earning in the super fund. We get to retirement and oh you have too much super so a good portion of it is taxed again. When you die if you have not arranged your affairs well your kids get slugged with what is left in super

Allan
October 28, 2021

One's having paid taxes does indeed entitle one to a pension given there's myriad those who've never paid a brass razoo in tax yet they'll regularly receive not only the pension - which only serves for starters in keeping them on the benevolent books - but heaps of handouts besides, all of which'll always be covered by a timely dose of quantitative easing. Just as easy as it is for one to print inflated claims, so too can money be printed to paper over huge cracks. 

Bill
October 29, 2021

Having paid taxes all your life has nothing to do with entitlement to a pension. A pension entitlement is dependent ONLY on age, residential status, assets and income. Whether you have paid taxes or not has nothing to do with it.

With regard to taxing of superannuation when it is paid out, the horse has bolted with the current system. It would be fair to tax superannuation payouts if the earnings and deposits had NOT been taxed whilst in accumulation mode. Perhaps there is an argument to set up an alternate system whereby deposits and earnings on a fund are not taxed, but payments ARE taxed.

Wendy
November 03, 2021

The real problem is the now cost of housing. Auction on a home unlike auction on an object that has no impact on future housing has caused this problem. Auction on the home goes to whom ever has the most money not how much it's really worth. That's inequality and unsustainable. Yes the horse has bolted but Govt choices could still change .

Dudley.
October 28, 2021

"Stop treating the family home as a retirement sacred cow":

'Don't treat the Family Fortress as Public Property.'

Retirement is just the second to last phase of life. Include also the Dying Phase - where a home provides the capital for Age Care - and come to a different conclusion.

Treat the cause to fix the symptoms. Age Pension for all age and citizenship eligible.

Noel Whittaker
October 28, 2021

You talk about special tax concessions from the family home. In the United States for example there can be a capital gains tax on the family home but much of the interest is tax-deductible. It's not as simple as it sounds.

Max Lewis
October 28, 2021

Of course it should be the 'sacred cow' and why not. Essential study for Democracy and Freedom of Choice 101 is to watch the movie "the Castle.' Many of todays retirees acquired their homes in a 'non Government hand out ' society, they educated their children on the same basis, they were making contributions before compulsory superannuation was initiated and they struggled with their mortgage repayments with interest rates of 18% plus. They are not in need of socialist inspired ideologies, which suggest they should feel guilty about what they have achieved and the manner in which they wish to treat their home for the rest of their lives. Incidentally ,simply because a home in one area is worth more than one in another, is not demanding of the grasping of suggestions of inequality. but simply requires common sense acceptance. LIfe and achievement is not a handicap race like the the Melbourne Cup.

Brian
October 29, 2021

Having worked since we were 18 years old my wife and I have retired into our mid 70s. We have now a lovely house at the seaside after risking everything, including a lifestyle to get here. We will never draw a pension unless some very knowledgeable finance smarty convinces those who can see that they can profit by joining that tend and force us out of our retirement home.

Dudley.
October 29, 2021

"We will never draw a pension unless some very knowledgeable finance smarty convinces those who can see that they can profit by joining that tend and force us out of our retirement home.":

Capital efficiently invest all but $405,000 in home improvement then claim Age Pension $37,000; add investment earnings $16,640 and capital gain of ~6% on home; all tax free. No need to leave home.

Ramani
October 28, 2021

In the fiduciary world, the cynical truism is if it is not conflicted, one is not interested. In the world of fiscal policy, this morphs into : 'To remove the various forms of bias, the policy-maker should be biased against basic human instincts', with apologies to Ben Bernanke who was once understood and was suitably shocked. Adding to the bias already listed, consider the increased unwillingness / inability to change familiar settings as one ages; the asymmetry of parents having to look after kids on pain of suborned income, but adult kids have no reciprocal obligation; parents' net wealth can be and is inherited or litigated but their net debts are not, leaving unsecured creditors short. Cognitive dissonance (or a shared acceptance of illusions, to keep life going for a while) means that most people behave as if they live forever until they don't. Their quarelling inheritors often disregard their own looming mortality. 'The Castle' epitomised the conundrum well: policy-makers can tinker with our houses but not our homes. Unknown to engineering, the bricks and mortar are commingled with emotional concrete that congeals over time. Therefore reforming the housing inequities - very real, and hurts those suffering from Piketty inequality - ranks with world peace, political integrity and alchemy.

Lisa
October 28, 2021

Lets set up the system so that oldies will be forced to sell their homes and rent in retirement. That will end well.

Theo de Jager
October 29, 2021

No, they should be allowed to keep the retirement home they worked for and paid off. It is for having ownership rights that they worked and saved. Those rights should be left alone in retirement.

Newhorizon
October 31, 2021

Yes, bring in your system in forty years time. Should end quite well then.

Dobi
October 28, 2021

House ownership provides a goal most people aspire to and to make changes that encourage people to rent would be counter productive as the old age pension would come under more pressure as most people would not save the house payments they would have made and would not be able to downsize, also the pension is barely adequate if one does not own a house. The psychological trauma an elderly person would suffer when forced out of a rental would be something many could not cope with. For elderly people who through hard work or foresight live in valuable houses but qualify for some form of pension the system could be changed to include the the value, over a certain amount, to be included in the assets test. This would not disrupt their lives but force them to consider a reverse mortgage

Lynn
October 28, 2021

I totally agree that policy settings not only encourage people into home ownership from a financial point of view...but encourage them to stay....I'm happy to discuss fixing these policies (even if they are the 'third rail' in australian politics), but all too often articles re home ownership and retirement totally ignore the massive psychological difference between owning a home and owning some other more liquid asset.... A home is part of our identity...our story....not to mention our sense of security and self determination...As we age, this story and sense of identity becomes more and more important to hold onto...A home is an asset like no other, and even if policy settings were rectified, it should still be impossible to expect people to treat a 'home' like owning a BHP share. Just observe the emotional rollercoaster people go through when they 'downsize'.... The differential policy treatment of renters and home owners definitely needs to be fixed...but I'm also sure that renters are entitled to all those emotional benefits of a home and their right to security of their 'home' also needs to be fixed.

Allan
October 28, 2021

"[...] A home is an asset like no other, ... [...]" 'Eminent domain', also known as 'expropriation', can rudely relieve anyone of their home and/or land in one fell swoop as will likely happen (if not already) to people in Tasmania? whose houses prevent the widening of a major road. Some of these houses have been done-up lovingly like sore toes over many years but alas the value of all the improvements will not be compensated for anywhere near their worth when the properties are resumed by the State. Property 'owners' are really only temporarily renting the use of their homes/land, remembering that we're all living on borrowed time. Now that the 'gold standard' has disappeared, I equate house/land prices with exactly that of 'fiat currencies', both of which Grinchy governments can reduce to razed rubble sans any 'grounds' for doing sod.

Cam
October 28, 2021

My parents are in the 80s and live in Sydney. They're worth maybe $2.5m, $2m being the value of the family home. So the current set up benefits them in that they get a part age pension, and benefits me and my siblings in that the home value is being preserved as a future inheritance. My strong view is their home should be included in an adjusted age pension asset test.
The stark reason for this is my wife's parents, who bought their home in a large regional centre around the same time as my parents and for around the same value have home equity of around $400k. Neither couple has done anything significantly differently other than the location where they bought their home.
As a result, my parents are able to be a much bigger bank of mum and dad, have much more flexibility in age care options, have much more opportunity to access home equity to prop up their lifestyle if needed.
I am a strong believer in passing on wealth. The various housing markets however create massive windfalls to some. I note the Vic Government is currently looking to capture windfall property wealth gains for farming property on the outskirts of Melbourne which gets zoned for subdivision. Effectively recognising the significant house value increase inside capital cities is the same thing.

Martin
October 28, 2021

This proposal would cause a greater divide between the very wealthy and middle and low income classes. Is it perfect NO but current taxation laws skew the benefits of any wealth creation towards the top. Stopping very wealthy retirees from access to tax they haven't paid is considered unjust and unfair but making a couple who have paid off a house over 30 years is considered fair. 

PJK
October 28, 2021

Paying a mortgage on a family home is done from after tax dollars and involves a lot of sacrifice. You save to buy a home. You avoid either being in public housing and/or receiving rent assistance. You hold the home for a long time due to bringing up kids and grandkids there, you make friends and its a home environment. Maybe also stamp duty means a disincentive for moving. Property prices have risen a lot over time for many complex reasons. That property prices have longer term risen in metro areas compared to regional is obvious. Its called strong demand and lesser supply. But. Regional property prices have grown a lot in the last two years due to WFH meaning needing to be near the office wasn't required. Should regional folks who've property values suddenly increased then be subject to assets test inclusion? You cannot have postcode discrimination regarding means testing, its all in or none. Many of those places have median values not far off Sydney's $1.5m. Also the debate about calling older people selfish who want to stay in their home for a longer period is disgusting. Why should they move? 

 

Leave a Comment:

     

RELATED ARTICLES

Survey responses on pension eligibility for wealthy homeowners

There’s a lot more to retirement incomes than super

10 reasons wealthy homeowners shouldn't receive welfare

banner

Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Latest Updates

Investment strategies

Are these the four most-costly words in investing?

A surprisingly high percentage of respondents believe 'This Time is Different'. They may be in for a tough time if history repeats as we have seen plenty of asset bubbles before. Do we have new rules for investing?

Investment strategies

100 tips from our readers for new investors

From the hundreds of survey responses, here is a selection of 100 tips, with others to come next week. There are consistent and new themes based on decades of experience making mistakes and enjoying successes.

Strategy

What should the next generation's Australia look like?

An unwanted fiscal drain will fall on generations of Australians who have seen their incomes and wealth stagnate, having missed the property boom and entered the workforce during a period of flatlining real wages.

Shares

Bank results scorecard and the gold star awards

The forecasts were wrong. In COVID, banks were expected to face falling house prices, high unemployment and a lending downturn. In the recovery, which banks are awarded gold stars based on the better performance?

Exchange traded products

In the beginning, there were LICs. Where are they now?

While the competing structure, ETFs, has increased in size far quicker in recent years, LICs remain an important part of the listed trust sector. There are differences between Traditional and Trading LICs.

Shares

Should you bank on the Westpac buy-back?

Westpac has sent out details of its buy-back and readers have asked for an explanation. It is not beneficial for all investors and whether this one works for some depends on where the bank sets the final price.

Investment strategies

Understanding the benefits of rebalancing

Whether they know it or not, most investors use of version of a Strategic Asset Allocation (SAA) to create an efficient portfolio mix of different asset classes, but the benefits of rebalancing are often overlooked.

Shares

Six stocks positioned well for a solid but volatile recovery

The rotation to economic recovery favouring value stocks continues but risks loom on the horizon. What lessons can be drawn from reporting season and what are the trends as inflation appears in parts of business?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.