O'Donnell Kerr Financial Planners
  • 07 March, 2019

Pensioners living in million-dollar homes!

As many readers will be aware, the family home is exempt from means testing for Social Security benefits, including the age pension.

But this hasn’t always been the case.

When the Commonwealth first introduced the age pension back in 1909, the family home was included as an asset. However, in 1912 the Government of the day made a decision to exempt the family home from the assets test.

And that is the way things have been for the past 107 years.

But the big question is, ‘will the family home always be exempt?’

Every so often the conversation turns to including all or a part of the value of the family home in the assets test for Government benefits, including the age pension.

Just in the last couple of weeks, the Institute of Actuaries of Australia used its pre-Budget submission to argue that the value of the family home that should be exempt from means testing should be capped.

This is not a new idea.

Over the years, there have been many suggestions that the age pension, in its present form, is unsustainable in the longer term and the way eligibility is assessed needs to change. Some suggestions include having the entire value of the home included as an asset, while others suggest that the value of the home above a certain threshold should be assessed.

In its 2015 Research Paper ‘Housing Decisions for Older Australians’, the Productivity Commission modelled the likely effect of including all, or a part of the value of the family home in the assets test. Certainly, the higher the value cap threshold, the less pension recipients were likely to be affected.

Would including all, or a part of the value of the family home mean the end of the world for current and aspiring pensioners?

It would certainly be disruptive; however, it wouldn’t signal the end of the world.

Having said that, I believe it would be a very brave Government that would introduce such a measure. And perhaps it is something that might be introduced at the beginning of new parliament so that those affected have three years to get use to living in a substantially altered world.

However, Australians are a very resilient bunch and I am sure we would adapt.

If a Government introduced means testing of the family home, many pensioners would suffer a drop in their pensions. They would then be forced to either live off less or generate income from other sources like the equity in their home.

This could be achieved in a number of ways including downsizing, moving in with the kids, moving to a cheaper property, taking in boarders or renting out a room through Airbnb. Or perhaps our pensioner with their now reduced income might participate in an equity release scheme like a reverse mortgage or the soon-to-be-improved Pension Loans Scheme offered by the Federal Government. The devil would certainly be in the detail!

One thing is for certain – change is constant.

We need to be informed of developments, express clear and logical arguments in favour or against change, and be open-minded and adaptive when decisions we don’t like are thrust upon us.

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