Home equity could provide “valuable income boost” for retirees

Retirees struggling to make ends meet could get a “valuable income boost” by accessing the equity in their homes, a paper from the Actuaries Institute (AI) is arguing.

Not only would this provide a cash injections for asset-rich, income-poor retirees, but it would also free up housing stock for younger generations.

The AI says there needs to be a rethink of how the family home is viewed. Traditionally, the family home has been seen as a ‘nest egg’, something to sit passively gathering wealth, to eventually be passed on.

It’s formed the core of our wealth-building strategy since federation, and as such has been off-limits to both the tax man and Centrelink.

Asset-rich, income poor

But a decades-long property boom has meant many Aussie retirees are now stuck in a situation where they have a valuable (but non-liquid) asset, but very little liquid income from super or the pension.

And with life expectancy increasing, those entering retirement today spend longer in that phase than any generation previously. This will require even more funds than most currently have.

Andrew Boal, actuary and author of the paper, More Than Just a Roof, says many retirees are living unnecessarily frugal lives in retirement because of a reluctance to part with any of the family homes value.

“While most retirees own their own home, 60 per cent retire with less than $250,000 in their super,” he says.

“As a result, they’re often living more frugally than they need to. But this doesn’t need to be the case. It’s time for us to reconsider the role of the home as a fourth pillar of our retirement income system – alongside the Age Pension, superannuation and voluntary private savings – which could be treated as another financial asset to fund retirement lifestyles.

In the paper, the AI says there needs to be more – and better – information and education out there about releasing equity.

The group suggests a number of policy reforms that it says would encourage retirees to access equity and change the existing ‘nest egg’ mindset.

The reforms include:

• Removing or refunding stamp duty for over 55s who downsize their home

• Extending access to downsizer contributions to superannuation to also include amounts released through an equity release scheme, such as reverse mortgages.

• Relaxing the Age Pension means test for part of the value of equity released from the family home when it is sold (e.g., $300,000 per person/ $600,000 for couples).

• Providing Age Pension means test relief on money accessed through home equity release schemes, such as reverse mortgages, up to the same cumulative limits

• Gradually including part of the value of the family home, above a reasonable threshold, in the Age Pension means test.

But will people go for it?

More than 80 per cent of Australians between the ages of 65 and 74 own in their own home, and retirees hold trillions of dollars in housing equity.

Mr Boal says unlocking even part of the wealth could see most Aussie retirees continue to live a comfortable lifestyle for decades longer.

“If retirees accessed 20 per cent of the $1.3 trillion they hold in home equity, it would unlock about $260 billion to help fund what could be 25 to 30 years or more in retirement,” he says.

That may be the key to convincing people – if they can demonstrate how much longer you can extend your current lifestyle.

Mr Boal acknowledges that any policy changes would be going against decades of orthodoxy and would need to be phased-in gradually.

 “These policy reforms could unlock billions of dollars to improve retirement living standards and at the same time help increase the supply of larger homes for young families, easing Australia’s housing supply issue,” Mr Boal says.

Do you own your own home? Would you ever consider unlocking any of the equity? Let us know in the comments section below.

Also read: Stats show over-50s make up two-thirds of public housing residents