Having your cake and eating it too

For many, retirement is that time in life when thoughts turn to enjoying life without the drag of having to go to work to keep food on the table. As my dear colleague, Mark Teale has often said, retirement is “my time”.

But retirement can bring its own share of stress and anxiety – often this is money related.

Once the pay cheque from regular employment stops, where does the money come from to pay the bills and cover living costs?

Around 75% of Australians in their mid-sixty’s and older, have some of their retirement income provided by the Commonwealth government in the form of the age pension.

However, even the full rate of the age pension is not going to provide for a particularly flashy lifestyle.

To put this in context, the current[1] full rate of age pension for a single person is $25,155 per year, and the rate for a couple is $37,923.

While there are some folks whose only source of retirement income will be their age pension, many others draw income from other sources to meet their living expenses.

The Association of Superannuation Funds of Australia (ASFA) publishes quarterly estimates of what they consider a single person, and a couple, need by way of income to support both a modest, and a comfortable lifestyle in retirement.

Recent figures[2] from ASFA suggest a single person aiming for a comfortable lifestyle will need around $44,818 per annum, while a couple will need around $63,352. For more information on this, see our blog, Show me the money, published on 1 September 2021.

The dilemma faced by many people is how to generate sufficient money to live on in retirement.

The age pension will go part of the way, but often there is still a gap that needs to be filled.

An income stream from superannuation or other investments and savings will help to top up any age pension. Self-funded retirees, i.e. those ineligible to receive any age pension, will rely exclusively on their own financial resources for their retirement income.

Enter the family home.

If we are fortunate enough to own our own home, and depending on where we live in Australia, we may have experienced a significant increase in the value of our property over the past couple of years.

For some, accessing part of the equity in their home may enable them to “top up” their retirement income.

There are several ways this can be achieved.

1. Downsizing
   • Selling the family home and moving to a less expensive home or a unit in a retirement village.
   • The surplus money received from the sale can be invested to top up retirement income.
2. Reverse Mortgage
   • A reverse mortgage involves taking a loan secured against the family home.
   • Depending on the lender, the loan can be drawn either as a lump sum amount or as regular income payments. There is no requirement to make repayments and the interest on the outstanding loan is capitalised.
   • The loan and capitalised interest, along with any fees, is then repaid when the home is sold.
3. Equity release
   • This involves selling a part share in your home to one or more investors or, more commonly, to a property investment fund.
   • You receive a lump sum payment, and you get to stay in your home for as long as you wish. You pay the ongoing expenses associated with your share.
   • When the home is eventually sold, the sale proceeds are shared between the owners.
4. Pension Loans Scheme
   • The Pension Loans Scheme is a government funded reverse mortgage arrangement.
   • It is available to those of age pension age, irrespective of whether they receive a pension or not.
   • It is secured against a person’s home or other property they own.
   • Payments are made to the homeowner fortnightly and are limited to a maximum of 1½ times the maximum fortnightly rate of age pension, less any age pension already being received.
   • For example, a couple receiving the full rate of age pension could receive up to an additional 50%, or $729.30 per fortnight, under the Pension Loans Scheme. A self-funded retiree couple could receive up to $2,187.90 per fortnight.
   • If additional income is only required for a short period, the Pension Loans Scheme can be turned on or off as required.
   • Interest is payable on the amount advanced under the Pension Loans Scheme. The amount drawn under the scheme, plus capitalised interest, is repayable when the home is sold.

Accessing home equity under any of these arrangements may have an impact on social security entitlements. In some cases, there may also be income tax implications. The legal implications may also be complex so seeking appropriate professional advice before proceeding is highly recommended.