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Should I maximise my pension by investing in the family home?

In Australia there is no universal pension as exists in, for example, New Zealand. The age pension is designed to support the basic living standards of older Australians. It's not a recognition of taxes paid previously, although this is a popular perception. It's to stop older Australians living below the poverty line.

It is a welfare payment that targets pensioners by applying a means test. The amount of age pension paid is determined by both an income test and an assets test. Both tests are used and the lower pension is the one adopted. Both tests apply a threshold and income or assets above those thresholds will reduce the pension.

This discussion will focus on the assets test because not all assets are assessed.

Assets test

To receive the full pension, assets must not exceed:

For both singles and couples, the pension is reduced by $3 per fortnight for every $1,000 over these thresholds. The part-pension is reduced to zero when assets reach:

 

The rate of pension reduction - or taper rate - of $3.00 per fortnight is $78 per year per $1,000 over the threshold, or 7.8%. An additional $100,000 invested at 6% will reduce the pension by $7,800 but investment income is increased by only $6,000 (ignoring any tax impact).

The reverse is also true. A reduction of $100,000 in assets will increase the pension by $7,800 but only $6,000 in investment income will be forfeited. Unless homeowner couple pensioners can earn at least 7.8% on their investments, they maximise their total income (pension plus investment income) by having no more than $419,000 in assets.

Instead of encouraging and rewarding saving and accumulating assets in retirement, this taper rate encourages the reverse.

Prior to 2017, the taper rate was $1.50 per fortnight or $39 per year per $1,000 over the threshold, or 3.9%. In that case, pensioners had no incentive to reduce assets because spending it would reduce both their pension income and the capital available to be liquidated over time.

Following a review, the government changed the taper rate as it was alarmed by the number of millionaires receiving a part-pension. The change disqualified about 300,000 people from a part-pension. To soften the blow, the government gave these people automatic access to the Commonwealth Seniors Health Card (CSHC) which provides almost equivalent benefits to the Pension Card.

The other sweetener was to increase the lower threshold, the point where the pension starts to decrease. That was increased as follows:

  • Single: $209,000 to $250,000 which is now $280,000 through indexation
  • Couple: $296,500 to $375,000 which is now $419,000 through indexation

Changes to this threshold made more people eligible for the full age pension.

The government seems reluctant to change this perverse taper rate because a less punitive taper rate would create another round of millionaires eligible for a part pension and that would impact the budget and enrage the media.

Investing in the family home may not be the best idea

Pensioners need to navigate the current taper rate which incentivises the reduction in assets to increase income. The fact that the family home is exempt from the assets test gives a strong incentive to overcapitalise the family home by renovating or upsizing in order to maximise the pension.

There are some who advocate this strategy. They aim to have no more than the permissible amount in assets that ensures they receive the full pension with all remaining capital invested in the tax-free family home. According to this view, retirees would be better off financially by becoming pensioners using the taxpayer's money.

This strategy for self-impoverishment is short-sighted.

With the assets test, the only thing not counted is the family home. Everything else is assessed including house contents, the car, caravan and bank balances. To receive the full pension, a homeowner couple can have $419,000 in assets. If fully invested, they can earn 6% on say $400,000 or $24,000 on top of their pension of $40,000 or about $64,000 together. Many would consider that to be a comfortable retirement income.

The first problem with this strategy is there can be no spare cash for the next car, holiday or roof repair because it’s all invested. Any spare cash in the bank will be assessed under the assets test and will not earn 6%. And, if some of this capital is spent, investment income is reduced without any compensating increase in the pension which is already at the maximum. There is also little capacity to rebuild those assets by returning to work.

Secondly, these pensioners then need to deal with Centrelink on a fortnightly basis and this means a loss of privacy and being subject to strict gifting rules. Such frequent Centrelink contact is not a pleasant experience.

Thirdly, because they are then totally dependent on Centrelink, these pensioners are as exposed to legislative risk as superannuants. The pension rules could change and they would have only limited capacity to respond unless they sell the family home, and that has its own complications.

By contrast, consider the couple who have $900,000 in assets. Using the same investment return, their income is $54,000 plus a pension of $2,719.60, but they have $900,000 of capital available to draw upon as needs arise. In fact, they are in the enviable position, where they can spend $100,000 and while they forfeit $6,000 in investment income, they gain $7,800 in additional pension income.

Self-funded retirees are even better off. Not only do they have more assets, but they don’t need to deal with Centrelink. They have complete discretion over the disposal of their financial assets.

What about a wealthier couple?

Consider a couple who maximise their tax-free super pension accounts of (currently) $1.7 million dollars each, or $3.4 million together. That gives them a tax-free annual income, using the same investment return, of over $200,000. It is difficult to see why any rational couple would remove $3 million from their super fund to upsize the family home just to qualify for the full pension. Their income would fall from $200,000 to $64,000 and they would then need to answer to Centrelink for every change in their circumstances.

Of course, that calculation may be different for pensioners who only just miss out on the pension due to excess assets, but the motivation then is often simply to gain access to the Pension Card and not the minimal pension. Few realise the CSHC provides almost equivalent benefits for self-funded retirees and the eligibility rules have recently been relaxed.

Additional investment in the family home to maximise the age pension becomes a straitjacket. The age pension limits the assets available for investment and therefore investment income. In retirement, your lifestyle is defined by your income, not the size of your family home. Income provides choices in every sphere of life.

To voluntarily put yourself in that straitjacket, at the mercy of politicians and bureaucrats, comes at a high price in terms of reduced income, and loss of discretion over your own affairs. To do so just to receive a refund of your taxes seems ill-advised and injurious to a long and happy retirement.

 

Jon Kalkman is a former Director of the Australian Investors Association. This article is for general information purposes only and does not consider the circumstances of any investor. This article is based on an understanding of the rules at the time of writing.

 

27 Comments
Mark
February 22, 2023

If you're in that close to getting/not getting the aged pension then I think it is prudent to do what you can to get the pension.

If you're quite wealthy, it's not really worth it

Dudley
February 22, 2023

"If you're quite wealthy, it's not really worth it": Depends strongly on interest rates and inflation. If $5M wealthy with interest rates 0.1% and inflation 7.8% then the choice is: . interest income +$5,000 / y, inflation financial capital loss -$390,000 / y; net -$385,000 / y. . age pension income +$40,000 / y, inflation home capital gain +$390,000 / y; net +$430,000 / y. What a difference Age Pension makes: +$815,000 / y. The difficulty if finding a $5M home that costs less / y than the Age Pension to maintain.

Graham Wright
February 19, 2023

Very grateful my wife and I are renters with its inherent issues and aged pensioners drawing a full pension with a smaller but for us, reasonable sum of investable money just inside the minimum pre-impactable on our pension. Most importantly, I have been dealing with Centrelink for 12 years as a pensioner, a factor that seems to be missing from many contributors here. My dealings with Centrelink are not like those of the unemployed or disability who claim a benefit from a variable circumstance such as changing health needs or employment searching or income. Consequently we seldom have to report anything except particularly large changes to our assets or large gifts we may choose to make to others. We have had a circumstance where Centrelink failed to quickly re-assess our pension entitlement after an asset increase, overpaid us for some time then demanded repayment of the overpayment within 2 weeks. I easily negotiated repayment over 3 months very easily. On another occasion we had an issue caused by our then SMSF administrator. The easiest way to solve it was to give our annual SMSF reports for several years to Centrelink as a bundle to prove our circumstances had not changed. As a result we got increased benefits and a backpayment each. Also, when I started apply for my pension about 6 months before I ceased work, I was told, without our knowledge, my wife would be entitled to the pension some 4 months earlier than me and that she should apply for hers immediately. With both of us sharing our assets, our entitlement took some time so she got hers later than her commencement date but back-paid in full to her commencement date.
In my experience, Centrelink staff work strictly to the letter of their governing laws and they will assess your entitlement and give you what you are entitled to whether or not you know your entitlements so long as they can contact you. You need to trust them and provide full and detailed asset and income information because if you create a little doubt of your integrity, they will probably fully probe your integrity. You are entitled to question or challenge their interpretation of their governing laws but the front counter people generally are not well enough informed to answer your question or challenge so best to start at the top and work down. I have done this several times. It takes time, sometimes months, but you can get responses you can challenge further or find satisfactory.
Dealing with Centrelink takes time, patience and truth for good outcomes. They make mistakes that show you should check and if necessary question their responses In dealing with them, always be polite, never rush or overlook any of these or try to obfuscate your true position or trouble will surely follow you.

June
February 17, 2023

Since when did the Government give "wealther" retirees "automatic access" to the CSHC? Did I miss something?

Jon Kalkman
February 18, 2023

In 2015, when the taper rate was changed, it meant that about 300,000 people lost their part pension. As compensation, they were given automatic access to the CSHC.

Since January, the income test for the CSHC has been considerably relaxed. There is no assets test. To qualify you need to be of pension age, but not receiving the pension.

stefy
February 19, 2023

I very recently applied for the CSHC at Centrelink.
My experience with the staff was a very pleasant surprise. They were extremely helpful and professional. The application was completed quickly, which was made very much easier because I am single. My assessment was granted within a week.
My only gripe is with myself, in that I didn't know about the CSHC much earlier. I just assumed the assessment would be the same as the pension tests, which is not the case.

Tony
February 17, 2023

Aussie HIFIRE.
Councils value properties for rating purposes so these valuations could be used if the home were included in the asset test. The current system is discriminatory to people that live in regional areas where homes are generally less valuable than in the cities. If people struggle there is always the pensioner loans scheme.

Aussie HIFIRE
February 17, 2023

Using the council valuations would certainly be one fairly easy way of getting a value for the family home, although one might question how accurate the valuations are. The next step would then be deciding how exactly to incorporate the value into the assets test. Is it just included in it's entirety in which case almost anyone living in Sydney or Melbourne with a paid off home immediately loses the age pension, does the threshold increase, if it does increase then is it on a nationwide basis or city/regional or suburb or perhaps an amount above the average home price for the city/suburb etc.

In any case it would certainly increase complexity, and given how bad Centrelink is at dealing with the current simple rules I do not have much faith that they could deal with a more complex test.

Which is not to say that I don't think that the current system is ideal, just that I think any new system incorporating the value of the family home is going to make things better. In particular in the transition period between the current system and the new one.

David
February 18, 2023

Councils generally levy rates based on the unimproved value of land, they ignore what's sitting on top of it. Councils do not value "property" as is being discussed here.

David Boyd
February 19, 2023

Yes, David is correct about government bodies only determining the unimproved value of land - the UCV. In NSW it is the Valuer Generals Department. The UCV is then used to determine local council rates and land tax in NSW. I note that in the Sydney area the current and approximate market value of many properties can be gained by typing an address into a search engine. There are normally several sites that advise of the likely and current market value. Many of these sites update the information often monthly. In addition one can also use these sites to obtain details of recent sales in the area. Further, even though a property may be on the market and there is no advertised asking price, searching the many sites and entering the words “estimated selling price” or similar words will often lead to an understanding about price. There is more than one reason why the current market price may be interesting to someone, other than government. I know of a family friend who recently asked a solicitor to prepare a new will. The solicitor asked about the value of assets including the family home. The value of real property may also be of interest in the cases of a divorce settlement as well as probate or maybe other reasons. One reason might be to assess the information being supplied by competing real estate agents as they seek to list a property for sale.

Can
February 19, 2023

Great idea.

Dudley
February 17, 2023

"The reverse is also true. A reduction of $100,000 in assets will increase the pension by $7,800 but only $6,000 in investment income will be forfeited.":
$100,000 invested in home improvement;
. likely capital growth +$6,000 / y,
. investment income -$6,000,
. extra age pension +$7,800 :
Net +$7,800 / y indexed for life plus improved home - no income tax.

"earn 6% on say $400,000 or $24,000 on top of their pension of $40,000 or about $64,000 together .. a comfortable retirement income.":
Living expenses $25,000 / y; leaves $39,000 to save.

"first problem with this strategy is there can be no spare cash for the next car, holiday or roof repair":
Capital $400,000 plus $39,000 y savings.

"Secondly, these pensioners then need to deal with Centrelink on a fortnightly basis":
Have a predictable income; only report listed investments once when applying for age pension.

"Thirdly, ... legislative risk":
They are NOT coming to take your home.

Dudley
February 17, 2023

"consider the couple who have $900,000 in assets ... where they can spend $100,000 and while they forfeit $6,000 in investment income, they gain $7,800 in additional pension income":
Spend $100,000 on home improvement and gain about $6,000 / y growing, live in a better home rent free and income and capital gains tax free.

Dudley
February 17, 2023

"Self-funded retirees are even better off.":
They are never free of the long arm of the age pension taper rate.
To merely equal the age pension + earnings on threshold $419,000, at 6% return they need around $1,000,000.
In other words, of the $1,000,000, $581,000 earns net nothing.

Geoff R
February 17, 2023

I think the fairest solution is to treat all government aged pensions as loans, repayable when a person dies or moves into aged care etc and their house is sold. If a person dies with less assets than they owe then the loan is written off.

My kids have student loans that they have to pay back so why do pensioners get free money?

Dudley
February 17, 2023

"My kids have student loans that they have to pay back so why do pensioners get free money?": Because age pensioners would rather die than pay back whereas students would rather pay back than die.

Geoff R
February 17, 2023

"Because age pensioners would rather die than pay back whereas students would rather pay back than die."

lol - I always enjoy your insights Dudley.

Cam
February 16, 2023

Our plan at age 67 is to sell our family home in regional NSW and cash in most of our super and buy a unit on the northern beaches of Sydney. We'll have around $2m in super/savings and a $1m house, and estimate the top of the age pension assets test to be around $1.8m. The plan will see us pick up around $75k in age pension benefits (estimate of the full age pension). That's the equivalent of a 6.25% return on the $1.2m we'd draw out of super and put into the unit. Based on historic property price increases we estimate our wealth in the unit will grow so financially we're better off between home price growth and the 6.25% 'return' from the age pension. Between the full age pension and earnings on the super left we'll have around $65k a year to spend (in today's dollars), so it will be a while before we run down these savings. We can always do a reverse mortgage or use the Governments loan scheme if needed. People staying in their larger family home in Sydney/Melbourne are effectively already doing this.

Lisa
February 16, 2023

Think it is about time that the Centrelink rental assistance was increased. The pension is generous for those who own their own home but a poverty trap, mostly for women, who are renting. It must be devastating when one member of an asset less full pensioner couple dies and the remaining person has to contemplate paying the rent on their own. Tightening up rules for those with considerable assets should help pay for an increase in rental assistance.

Bakker
February 16, 2023

While not a supporter of upsizing to increase your AP..you can also double down with a reverse morgtage..in some cases this may negate some of the negative effects you tabled above.

Mark
February 16, 2023

The difference between the asset tests for Non home owners and home owners should be far far higher at the average for a house in Australia probably around $800,000 so 1,219,000 for non home owners and 419,000 for home owners for the full pension for a couple. This would make the system fair and more efficient and not biased towards property market that drives up house prices for younger people. But that is what all property investing politicians and media types want.

Aussie HIFIRE
February 16, 2023

I agree in principle with the idea of having a more realistic value of the family home in the assets test. The difficulty would be in making it fair for everyone though. If you use a flat figure of $800k (or any other number) then you can buy a great house in smaller cities or a tiny unit in various capitals. If you use an average value for a suburb or city then you have the same problem. If you assess the amount over an average value then everyone is going to be coming up with reasons why their house is worth less than the average. And of course there is then the issue of how exactly do you value the house, and who is going to be doing it? So it's going to be complex or unfair in one way or another, which is not to say that the current situation isn't already unfair, but at least it's not overly complex. 

Aussie HIFIRE
February 16, 2023

Imagine moving to Australia from overseas and being told that the age pension is a welfare payment for needy retired Australians, and in the same conversation being told that you can own your home worth a million dollars plus and have nearly a million dollars in investments and still get paid this welfare payment. You would be absolutely gobsmacked.

It boggles the mind that people who are working and paying to bring up their children, have to pay their mortgage, and of course fork over a hefty amount of income tax are propping up their parents and grandparents who have far more in savings and none of those expenses.

The sensible thing to do here would be to drastically cut the assets test so that we aren’t forking over a five figure sum of money each year to a couple with their own home, 700k in tax free super and a new car and home contents. And as much as I’m sure there will be some people who will do their utmost to get as much age pension as possible, I think a lot of people will accept that perhaps it wasn’t entirely right that wealthy retirees should be able to get a five figure sum of money each year from the taxpayers.

Dudley
February 17, 2023

Imagine living in Australia and telling extra-nationals that the age pension is only for people who paid little tax, those who paid most of the tax are ineligible. They'd giggle at the silliness.

Aussie HIFIRE
February 17, 2023

I think if you said that it's a welfare payment rather than a retirement entitlement it would make sense that people who haven't paid much tax would get it and those who have paid a lot of tax probably don't. But as it stands clearly most retirees think of it as an entitlement rather than welfare, not least because you can have nearly a million dollars and get it.

Dudley
February 17, 2023

"if you said that it's a welfare payment rather than a retirement entitlement it would make sense that people who haven't paid much tax would get it and those who have paid a lot of tax probably don't.":
Then they'd quizzically wonder what is the sense in encourage more non-tax payers with such a large bribe.

John
February 16, 2023

The government seems reluctant to change this perverse taper rate because a less punitive taper rate would create another round of millionaires eligible for a part pension and that would impact the budget and enrage the media. Maybe tax resources are limited and should be spent on infrastructure, preparing for climate change, preventing people living in poverty and not spent on wealthy pensioners who will transfer their inheritance to the next generation creating a massive disparity between rich and poor. You need to think about government policy from the perspective of others.

 

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